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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. This is Master's in

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Speaker 1: Business with Barry Ridholds on Bloomberg Radio. This week on

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Speaker 1: the podcast another extra special guest. Corey Hofstein is one

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Speaker 1: of these really fascinating quants who has just a really

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Speaker 1: interesting background. Not only did he stand up a research

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Speaker 1: shop from a dorm room in college and started selling

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Speaker 1: model portfolios to fund managers, but eventually created a suite

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Speaker 1: of first mutual funds and then ETFs, really pioneering the

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Speaker 1: concept of return stacking. People have described that in the

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Speaker 1: past as portable alpha. He does some really really interesting

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Speaker 1: research and gets deep into the weeds on things like

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Speaker 1: market structure, liquidly cascades, what really drives returns, how much

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Speaker 1: should you be focused on alpha versus beta? But most

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Speaker 1: fascinating of all, he is one of those rare quants

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Speaker 1: who has the ability to take complex, sophisticated quantitative topics

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Speaker 1: and make them very understandable for the average investor. If

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Speaker 1: you're at all interested in concepts of things like portable

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Speaker 1: alpha or return stacking, or just want to know how

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Speaker 1: a quant looks at the world of investing and tries

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Speaker 1: to decide where there are opportunities I found this conversation

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Speaker 1: to be fascinating, and I think you will also, with

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Speaker 1: no further ado, newfound research and returned stacked ETF suites.

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Speaker 1: Corey Hofstein, Corey Hofstein, Welcome to Bloomberg.

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Speaker 2: Barry, thank you for having me. Very excited to be here.

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Speaker 1: I'm excited to chat with you about things besides watches

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Speaker 1: and cars in real estate. Let's talk a little bit

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Speaker 1: about your background. You get a BS and Computer science

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Speaker 1: from Cornell, a master's in computational finance from Carnegie mellon

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Speaker 1: quantitative investing. Was was that the plan from the beginning?

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Speaker 2: Absolutely not really not No. I grew up in the

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Speaker 2: Super Nintendo generation, so I thought as a young man

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Speaker 2: that I was gonna make video games for a living.

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Speaker 1: Get out. Really I did.

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Speaker 2: And I taught myself to program when I was twelve.

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Speaker 1: Huh.

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Speaker 2: And all throughout late middle school and high school, I

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Speaker 2: was programming games for my game Boy and developing game

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Speaker 2: engines for the computer. I wrote my own programming language.

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Speaker 2: I really thought I was on a path to go

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Speaker 2: video games.

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Speaker 1: For what was your game of choice? As a kid, I.

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Speaker 2: Was a big Zelda fan.

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Speaker 1: Okay, I really was.

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Speaker 2: And it's funny I haven't played video games in probably

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Speaker 2: over a decade.

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Speaker 1: Same, And the really funny thing is so here the

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Speaker 1: age difference. I remember sneaking out of high school during

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Speaker 1: lunch with a buddy to go to the mall to

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Speaker 1: first start playing Space Invaders, then Galaxa, then Missile Command,

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Speaker 1: like these are all retro games. And then when I

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Speaker 1: started as a trader Tuesday nights, the quote server would

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Speaker 1: be taken offline and it would become a quake server,

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Speaker 1: and we spent and you just get lost in it,

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Speaker 1: and suddenly it's eleven o'clock and oh my god, I

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Speaker 1: missed dinner. But that's really fascinating. Why didn't you become

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Speaker 1: a game programmer?

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Speaker 2: As you mentioned, I ended up at Cornell for computer science,

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Speaker 2: and as much as I love the curriculum, I looked

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Speaker 2: around at the people I was in my classes with

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Speaker 2: and I said, oh, don I don't know if this

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Speaker 2: is whom I want to spend with, whom I want

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Speaker 2: to spend all of my time.

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Speaker 1: That's hilarious in a cubicle.

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Speaker 2: As it turns out, I like talking to people, I

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Speaker 2: like interacting, and I just sort of grew and evolved

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Speaker 2: from there. This was the era two thousand and five

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Speaker 2: two thousand and six, all of my friends were looking

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Speaker 2: to get banking roles. Everyone wanted to go work on

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Speaker 2: Wall Street, and so I sort of caught the bug

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Speaker 2: and saw, oh, there's this really interesting thing I'm learning

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Speaker 2: about called quant right, and I really liked the application

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Speaker 2: of math and statistics and computer science to markets, and

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Speaker 2: I just caught the bug. And that's where I said, Okay,

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Speaker 2: I think that's where I want to spend my career.

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Speaker 2: And so graduating right into two thousand and nine, right

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Speaker 2: out of the financial crisis, I said, I don't think

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Speaker 2: I'm going to get a job. Let me see if

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Speaker 2: I can go to grad school continue this education. And

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Speaker 2: that's how I ended up at Carnegie Mellon.

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Speaker 1: So let's talk a little bit about the timing there.

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Speaker 1: You're a Cornell six to nine, you're a Carnegie Mellon

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Speaker 1: O nine to eleven, but you start Newfound Research in

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Speaker 1: eight Well, what was this a dorm room? It is

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Speaker 1: the next Dell computer.

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Speaker 2: It was. It was very accidental. I never actually intended

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Speaker 2: to still be running this business sixteen years later. Truthfully,

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Speaker 2: I named it Newfound after a lake my family used

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Speaker 2: to visit in New Hampshire. It was truly a throwaway name.

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Speaker 2: But in college I was working on some quantitative research

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Speaker 2: models and happenstance we were talking about luck earlier got

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Speaker 2: introduced to a local asset manager outside of Boston who

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Speaker 2: saw what I was working on and said, this is

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Speaker 2: really interesting. Would you license these models to me. I'm

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Speaker 2: a broke college student who needs some beer money. Yeah,

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Speaker 2: And he said, I don't have any cash to pay

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Speaker 2: you with, but I'll pay you in basis points. I

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Speaker 2: did not know what a basis point was. I said, sure, man, whatever,

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Speaker 2: I'm going to grad school.

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Speaker 1: But by the way, most college kids pay for beer

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Speaker 1: money through quantitative model diviso.

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Speaker 2: That's right.

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Speaker 1: I mean, I think that's a generational thing, and why not?

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Speaker 2: Why not?

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Speaker 1: I don't know what a basis point is.

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Speaker 2: I didn't even know what a basis point was. And

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Speaker 2: so we get this contract written and I go off

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Speaker 2: to grad school, assuming I would go work at a

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Speaker 2: big bank doing sales and trading in some quant role.

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Speaker 2: And he ended up running a strategy based on my

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Speaker 2: research models that went from zero to several billion dollars.

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Speaker 1: Get out of here and a couple of basis points on.

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Speaker 2: That is a lot to add up, and it afforded

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Speaker 2: me the opportunity. It was interesting because this was a

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Speaker 2: big transition time in Wall Street where a lot of

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Speaker 2: the jobs I had been trained for when I went

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Speaker 2: through that graduate school program, who, by the way, today

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Speaker 2: looks nothing like the program I went through. It was

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Speaker 2: all about pricing credit default swaps. No it trades credit

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Speaker 2: default swaps anymore. So I'm looking on the other side

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Speaker 2: of this and I'm seeing all the jobs I wanted

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Speaker 2: to apply for disappear. And my father was an entrepreneur.

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Speaker 2: I always had the idea that I would do something entrepreneurial.

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Speaker 2: And I said, you know, young, naive, brash, twenty year old,

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Speaker 2: I said, well, I got a business that's already paying me.

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Speaker 2: Why don't I just keep doing this? And that's where

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Speaker 2: the journey began.

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Speaker 1: Right out of grad school, you just continued. Did you

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Speaker 1: even look at jobs? Did you apply.

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Speaker 2: Places I did not?

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Speaker 1: You just said, ah, I could be my own boss.

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Speaker 2: That's what happens in your early twenties. You have that

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Speaker 2: sort of brash arrogance.

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Speaker 1: That's amazing. So you have this one set of model,

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Speaker 1: it's generating revenue. What was the next step? How did

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Speaker 1: you turn this into a sort of quirky idea that is,

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Speaker 1: creating a little bit of revenue into an actual business.

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Speaker 2: Yeah, so that was that was a lot of stumbling

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Speaker 2: in the dark, candidly. So on the other side of

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Speaker 2: that contract is I got paid basis points, but I

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Speaker 2: had a confidentiality agreement with this firm, And so as

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Speaker 2: those assets grew, I'm now a young twenty year old

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Speaker 2: going out trying to go to other asset managers saying, hey,

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Speaker 2: I have this quantitative research. It helps power billions of

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Speaker 2: dollars of decisions. And they'd say, well, who are your clients?

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Speaker 2: And I'd say, I can't tell you.

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Speaker 1: You gotta trust me on this.

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Speaker 2: And you gotta trust me. And as you know, again

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Speaker 2: a young twenty year old, I'm sure I got laughed

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Speaker 2: out of a lot of offices. And there's a very

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Speaker 2: long story here that's better told over beers. But as

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Speaker 2: it turns out, the reason that asset manager was able

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Speaker 2: to raise so much money was because they had taken

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Speaker 2: signals I had sent them, turned them into rant a

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Speaker 2: back test, miscalculated that back test, and then ran around

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Speaker 2: telling everyone it was a live strategy.

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Speaker 1: Oh really, So it sounds like trouble.

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Speaker 2: Sounds like trouble. So to about twenty thirteen, I was

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Speaker 2: doing a lot of this research. I had sort of

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Speaker 2: started to move into more subadvisory index provider roles and

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Speaker 2: all of a sudden SEC comes knocking. And by the way,

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Speaker 2: at that point, that client was at thirteen billion dollars.

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Speaker 1: Wait, so your you just provide the model. You have nothing,

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Speaker 1: what's soever to do with how they marketed, who the

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Speaker 1: clients are, how they run it.

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Speaker 2: It's just a model, yes, and by and by the agreement,

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Speaker 2: I wasn't I wasn't even supposed to be in the

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Speaker 2: equation at all. I've never been introduced. No one knew

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Speaker 2: who I was. Somehow, no one in due diligence ever

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Speaker 2: asked them about any of this, right, And so thirteen

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Speaker 2: billion dollar firm gets a knock from the SEC, and

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Speaker 2: the SEC says, okay, you're calling this a live track record,

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Speaker 2: show us the audious.

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Speaker 1: The trade cracks record and it only goes back to nine.

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Speaker 2: And then you can imagine everything unraveled from there. And

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Speaker 2: so in twenty thirteen, I'm staring down my largest client.

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Speaker 2: All of a sudden it becomes obvious this is fraud.

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Speaker 1: Now by the way, how did the fund actually perform

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Speaker 1: when it was live?

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Speaker 2: Quite well, right, I mean that's why I gathered so

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Speaker 2: many assets.

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Speaker 1: So that's the crazy thing, is what led the Because

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Speaker 1: normally the SEC gets called in when somebody's losing money

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Speaker 1: and they're pissed, not hey, we're making money, but I'm

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Speaker 1: not sure I love this marketing.

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Speaker 2: Just a routine exam. You know, you run an RIA.

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Speaker 2: The SEC just comes knocking every once in a while

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Speaker 2: to say, hey, you just want to make sure the

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Speaker 2: compliance programs all set up. It happens every once in

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Speaker 2: every couple of years. And at that point they were

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Speaker 2: due for their routine exam. They had gone from nothing

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Speaker 2: to twelve billion. It was time for the SEC to

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Speaker 2: come kick the tires with what should have been a

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Speaker 2: very routine This is you know, dot the ice across

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Speaker 2: the t's. Oh no, it turns out you've got a

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Speaker 2: fabricated track record that, by the way, you miscalculated your

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Speaker 2: back test and it's an inflated fabricated track.

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Speaker 1: Well that's really a problem. That's really they ever come

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Speaker 1: knocking to you and said, hey, we uh.

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Speaker 2: It wasn't just knocking, because what happened.

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Speaker 1: Is, oh that subpoena is frightening, isn't it.

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Speaker 2: It was a subpoena, and as a twenty I guess

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Speaker 2: I must have been twenty three twenty four at the time.

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Speaker 2: Getting a subpoena from the SEC.

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Speaker 1: I'll get that'll wake you up.

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Speaker 2: Yeah, that'll that'll get.

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Speaker 1: The ice coffee, go right to the subpena.

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Speaker 2: And the gentleman who ran the firm that was my

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Speaker 2: client was was so convincing to the industry that he

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Speaker 2: had done nothing wrong during the SEC investigation. He grew

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Speaker 2: the business from twelve billion to twenty five billion to.

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Speaker 1: Get out of here.

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Speaker 2: Yes, wow, yes. And so during that time it's even

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Speaker 2: more basis points. Oh they stopped paying me that they did,

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Speaker 2: they stopped paying me. Needless to say, the SEC ran

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Speaker 2: a very aggressive investigation. I got subpoena. My life got

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Speaker 2: caught up in this SEC investigation, and I said, all right,

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Speaker 2: I've got two choices. I can leave this industry and

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Speaker 2: go go move to Silicon Valley. I got a computer

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Speaker 2: science degree. There's some good stuff going on out there.

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Speaker 2: Or I can plant my flag and prove to people

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Speaker 2: I did nothing wrong research here. And so that's actually

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Speaker 2: when I started blogging I started writing a weekly research

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Speaker 2: quantitative research report, just to say hey, look there's there's

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Speaker 2: something real here. Had a couple of employees. We started

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Speaker 2: publishing our research, getting out there more and slowly use

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Speaker 2: that the transition to be, you know, we're more active

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Speaker 2: on social media. Started the podcast a few years later,

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Speaker 2: just tried to try to say there's no there's nothing,

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Speaker 2: there's no fraud here. We were not the problem.

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Speaker 1: Hey, it's just a model, and we get we solved

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Speaker 1: it to them that the problem is what they did

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Speaker 1: with it. How did the SEC investigation resolve with you guys?

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Speaker 2: No issues?

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Speaker 1: Right?

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Speaker 2: Right? So they I mean anyone who's gone through this,

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Speaker 2: so I suspect the vast majority of people have not you. Eventually,

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Speaker 2: the SEC never says you're.

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Speaker 1: All right, You're okay. They just they stopped calling.

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Speaker 2: And then you ask for a letter that says, hey,

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Speaker 2: can I get some resolution, And they say we've determined

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Speaker 2: we're you know, we're not pursuing further inqueries into you.

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Speaker 2: And so I've got a nice letter framed from the

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Speaker 2: SEC that that says precisely that.

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Speaker 1: So framed framed on the wall.

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Speaker 2: Yeah, the other side did not end so well as

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Speaker 2: you can imagine they were bankrupt a year later and

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Speaker 2: twenty five billion dollars flew out to the wind.

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Speaker 1: Wow. So that's an amazing story. I had no idea

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Speaker 1: about that. I want to just go back a little

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Speaker 1: bit to Carnegie Mellon. You graduate with this quantitative background,

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Speaker 1: you went into your own shop. What did your classmates do?

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Speaker 1: Where did they go?

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Speaker 2: They went all over? A lot of them went to

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Speaker 2: big banks, A lot of them went to buyside hedge funds.

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Speaker 2: Some of them went to places like Citadel to trade

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Speaker 2: options market makers. I mean they really when you when

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Speaker 2: you talk about what is quant right, what you what

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Speaker 2: you learn? You learn everything from how to price structured products,

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Speaker 2: You learn the math that can help you with with

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Speaker 2: market making operations, you learn the technology. It's a really

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Speaker 2: broad field. And so what ends up happening is people

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Speaker 2: just sort of scatter to all parts of the industry.

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Speaker 1: Huh. I know you are not especially keen on back.

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Speaker 2: Testing now, definitely not keen on it.

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Speaker 1: So here's the question. How much did this experience affect

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Speaker 1: the way you look at back testing honest back testing,

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Speaker 1: really looking at the numbers versus exaggerating returns and making

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Speaker 1: up the claim that something's live when it's not.

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Speaker 2: I think my view of this has changed over time.

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Speaker 2: I've become I've always been very skeptical a back test

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Speaker 2: for all the reasons quants normally are. I think quants

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Speaker 2: perhaps did a disservice to this industry and making it

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Speaker 2: easier to show people back tests, right. I have a

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Speaker 2: theory unfounded. No one's ever confirmed this, but I always

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Speaker 2: sit around and wonder, why does Blackrock pay MSCI so

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Speaker 2: much money and indexing, you know, when Blackrock could clearly

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Speaker 2: run all these strategies themselves.

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Speaker 1: The historical track record now and it's so that's live.

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Speaker 2: Really Arrah Finra, one of the other regulators prohibits you

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Speaker 2: from showing a back test for a mutual funder in ETF.

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Speaker 2: But if it's an index DTF, which is a regulatory term,

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Speaker 2: if it's truly an index DTF, you were allowed to

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Speaker 2: show the index, presuming it's a third party index provider.

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Speaker 2: So what black Rock can do is say this is

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Speaker 2: an index ETF, it's index to this MSCI or SMP

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Speaker 2: smart beta product, and by the way, here's the thirty

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Speaker 2: year back tests. And of course that back test outperforms

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Speaker 2: the market. And I think that helped fuel the smart

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Speaker 2: beta boom of the twenty tens, and so I don't

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Speaker 2: think there's anything implicitly wrong with back tests if done well.

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Speaker 2: I think the problem is back test became a marketing.

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Speaker 1: Tool, Yeah, no doubt about it, and the SEC rules

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Speaker 1: on back tests have just changed to the point that

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Speaker 1: when I show a chart of the S and P

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Speaker 1: five hundred or or VTI like, I have to be

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Speaker 1: really circumspect in how I describe it. Here's how the

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Speaker 1: total market return has performed over the past thirty years.

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Speaker 1: That's about the most I can say versus, Hey, you know,

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Speaker 1: if you have a portfolio with ABCDE, here's what you

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Speaker 1: can expect. Like, the pushback we've gotten on some marketing

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Speaker 1: materials kind of surprised me. I understand they're trying to

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Speaker 1: create like a big no fly zone to avoid the

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Speaker 1: sort of problems that the guy who abused your model did,

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Speaker 1: but it's kind of like, aside from the fact that

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Speaker 1: past performance isn't necessarily relevant to what the world's going

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Speaker 1: to look like in the future, that's that's a very

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Speaker 1: different thing than Wait, I can't just show a chart

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Speaker 1: I don't understand.

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Speaker 2: Well, and I'm sympathetic to the point that a lot

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Speaker 2: of clients, whether they're advisory clients or my clients who

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Speaker 2: would be advisors and institutions, will ask the question, Okay, well,

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Speaker 2: how would this have performed during these different market stress scenarios,

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Speaker 2: And that's what a back test would, in theory show you,

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Speaker 2: And not being able to tell them or show them

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Speaker 2: makes it harder for them to do due diligence to

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Speaker 2: understand how it may have behaved right. And so there

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Speaker 2: are ways in which I think back tests can be

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Speaker 2: used appropriately. I understand the blanket no from FINRA, and

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Speaker 2: I understand the SEC's position on it because it can

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Speaker 2: be used in such a manipulative fashion. But I do

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Speaker 2: think it makes it it's easy to abuse, it makes

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Speaker 2: it hard to do thoughtful due diligence in certain cases.

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Speaker 1: I'm trying to get a sense of how your investment

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Speaker 1: philosophy developed. I recall reading that you were developing a

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Speaker 1: stock screener and you were focused on value based models

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Speaker 1: and discovered that they would get justice she'll act during

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Speaker 1: downturns as the growth stocks did. Tell us a little

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Speaker 1: bit about how screening led you to develop your philosophy

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Speaker 1: and what your thoughts are on momentum and trend.

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Speaker 2: So very early on in my career, again, I was

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Speaker 2: doing a lot of this on my own. I sort

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Speaker 2: of self discovered factor investing and was basically you using

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Speaker 2: statistical screens to try to find cohorts of stocks that

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Speaker 2: would behave in different ways.

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Speaker 1: And just to clarify, when you say factor investing, we're

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Speaker 1: really talking about FAMA, French factors, not necessarily smart beta

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Speaker 1: type stuff.

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Speaker 2: All of the above. All the above, I didn't I

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Speaker 2: didn't even know what it was at the time. I

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Speaker 2: was just trying to say, Hey, if I find a

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Speaker 2: basket of stocks and all the CEOs are bald, how

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Speaker 2: does that behave right versus oh, these all have positive momentary.

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Speaker 1: I got a great ticker for that ets yeah, balt.

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Speaker 2: I don't think anyone's used it yet. So I was

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Speaker 2: looking at all sorts of things, which is sort of

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Speaker 2: classical equity quant type work. And I've always sort of

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Speaker 2: had a tilt, just personality wise, towards capital preservation. And

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Speaker 2: there was one conversation very early in my career, this

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Speaker 2: was actually two thousand and seven, where I was interviewing

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Speaker 2: with an asset manager and I pre meeting asked them

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Speaker 2: what they thought of the market, and he gave me

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Speaker 2: the most bearish prognostication I had ever heard. And again,

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Speaker 2: I was very in my career. I didn't live through

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Speaker 2: the dot com fallout from a career perspective. I said

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Speaker 2: to him, well, what are you going to do? And

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Speaker 2: he was a small cap value manager, and he said nothing.

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Speaker 2: My job is to provide small cap value exposure. If

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Speaker 2: it's not appropriate for the client, the financial advisor should

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Speaker 2: make that decision. And so I said, well, I talked

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Speaker 2: to some financial advisors and they said, well, how in

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Speaker 2: the world should we know when to take our clients

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Speaker 2: out of small cap value. That's the manager's job. And

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Speaker 2: I said, well, in my opinion, no one's protecting my

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Speaker 2: capital here, and so I started really looking into statistical

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Speaker 2: models that I thought could help preserve capital. On the downside.

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Speaker 2: Value had worked incredibly well in the dot com era,

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Speaker 2: but my thought there was there was nothing inherent in

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Speaker 2: value itself that was necessarily protective in terms of the

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Speaker 2: type of crisis that could unfold. And so I ended

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Speaker 2: up discovering trend following and following in love with trend following,

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Speaker 2: which is the idea that it sounds naive, but as

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Speaker 2: prices have historically gone up, they tend to persist in

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Speaker 2: that direction, or if prices start to fall, they tend

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Speaker 2: to persist in that direction. And there's a little bit

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Speaker 2: of a statistical edge you can use there to try

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Speaker 2: to really clip your downside risk.

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Speaker 1: The challenge is always the transition from the uptrend to

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Speaker 1: the down trend, which is why you have portfolio managers

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Speaker 1: and allocators arguing who is responsible. The reality is nobody

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Speaker 1: wants that job because it's thankless and practically impossible. Very

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Speaker 1: few people seem to have come up with a formula

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Speaker 1: that works from one cycle to the next.

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Speaker 2: That's absolutely right. There's very few, I would argue, probably

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Speaker 2: no consistent predictors of any sort of economic or market cyclicality.

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Speaker 2: What you have is maybe some statistical indicators that give

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Speaker 2: you a slight bit of an edge. But when you

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Speaker 2: talk about just a slight bit of an edge being

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Speaker 2: played on, say a big position like the S and

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Speaker 2: P five hundred in your portfolio, and you're only going

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Speaker 2: to play that edge realistically three or four times in

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Speaker 2: your life, that's a very low breadth bet that's going

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Speaker 2: to have a really big impact. It's just not smart

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Speaker 2: on a math basis to do that, and it's certainly

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Speaker 2: not smart from a career risk perspective.

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Speaker 1: I'm so happy you said that, because I frequently find

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Speaker 1: myself wanting to respond to these claims on Twitter sample

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Speaker 1: set of three. Who cares? You know how every time

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Speaker 1: you look at the history of recessions, Hey, twentieth century recessions,

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Speaker 1: what is it? Twelve fourteen? Even that not a lot

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Speaker 1: of numbers. And are you saying the recession in twenty

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Speaker 1: twenty is similar to recession in the nineteen fifties. It's

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Speaker 1: such a different world. That you mentioned the dot com implosion.

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Speaker 1: The reason value held up was that was such a

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Speaker 1: sector collapse. What was the NAZAQ one hundred down eighty

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Speaker 1: one eighty two percent? And the S and P five

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Speaker 1: hundred was down something like a fraction of that, I

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Speaker 1: want to say, less than half, And then the Dow

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Speaker 1: held up really well, down thirty five percent something like that.

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Speaker 2: Well, and if you go back to the history, it's

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Speaker 2: because most of those value stocks had already sold off

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Speaker 2: forty or fifty percent in ninety nine, right, right, they

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Speaker 2: were in.

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Speaker 1: The late nineties. Anyway, they did poorly while the money

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Speaker 1: rolled into the big cap growth and technology media and

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Speaker 1: telecom exploded.

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Speaker 2: So this story came out that O value is defensive

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Speaker 2: because it has this valuation buffer to it.

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Speaker 1: In that one example.

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Speaker 2: But people extrapolated that one example, right, They took a

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Speaker 2: point and they drew a line, and then what happened

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Speaker 2: in two thousand and eight, Well, most naive value portfolios

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Speaker 2: are stuffed with financials, right, and value just got destroyed. Right.

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Speaker 1: So the obvious question to someone who makes that claim is, well,

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Speaker 1: how to value doing the nineteen seventies not especially well?

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Speaker 1: Look at the utilities, look at big oil compani as well.

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Speaker 1: But that was all about inflation. Okay, but you said

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Speaker 1: this is so it's a it's a hedge except when

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Speaker 1: there's inflation. What are the other exceptions that I always

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Speaker 1: come back to the sample set of three, sample set

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Speaker 1: of five. I need a sample set of a you know,

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Speaker 1: let's revisit this in the year three thousand. We'll have

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Speaker 1: enough data to be able to look at it.

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Speaker 2: So I have sort of philosophical view on this, which is,

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Speaker 2: if I knew that value worked to protect my capital

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Speaker 2: in every single recession, and I thought the market was efficient,

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Speaker 2: then I shouldn't be able to predict recessions, because if

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Speaker 2: I can predict a recession and I know value works,

438
00:22:33,600 --> 00:22:36,480
Speaker 2: then I've outperformed the market. So you know there's there's

439
00:22:36,520 --> 00:22:39,360
Speaker 2: an inherent limit here based on how efficient you think

440
00:22:39,400 --> 00:22:41,159
Speaker 2: the market is. And I'll tell you I think the

441
00:22:41,160 --> 00:22:42,320
Speaker 2: market's pretty darn.

442
00:22:42,119 --> 00:22:45,680
Speaker 1: Efficient, mostly kind of sort of eventually efficient. It gets

443
00:22:45,720 --> 00:22:50,080
Speaker 1: their event what's the Benjamin Graham quote. In the short run,

444
00:22:50,160 --> 00:22:52,840
Speaker 1: it's a voting machine, but a long run, it's a

445
00:22:52,840 --> 00:22:58,159
Speaker 1: wighing machine. That's the mostly efficient, eventually efficient market hypothesis.

446
00:22:58,480 --> 00:23:03,080
Speaker 1: So so given that, let's talk a little bit about

447
00:23:03,119 --> 00:23:07,000
Speaker 1: things like portable alpha. You've done a lot of work

448
00:23:07,000 --> 00:23:09,159
Speaker 1: in this, a lot of research. First, give us a

449
00:23:09,240 --> 00:23:12,840
Speaker 1: quick definition of isolating beta and alpha. What does portable

450
00:23:13,280 --> 00:23:13,920
Speaker 1: alpha mean?

451
00:23:14,520 --> 00:23:16,399
Speaker 2: If you're all right with it, I'm actually going to

452
00:23:16,440 --> 00:23:18,880
Speaker 2: answer this in a round about fashion type by saying,

453
00:23:19,359 --> 00:23:21,600
Speaker 2: what problem are we trying to solve here? First and

454
00:23:21,640 --> 00:23:25,320
Speaker 2: foremost right, and the problem we're trying to solve with

455
00:23:25,480 --> 00:23:29,280
Speaker 2: terms like portable alpha or return stacking is what I

456
00:23:29,359 --> 00:23:33,719
Speaker 2: would call the funding problem of diversification. It's a bit

457
00:23:33,760 --> 00:23:35,200
Speaker 2: of a mouthful. So what do I mean by that?

458
00:23:35,960 --> 00:23:40,920
Speaker 2: Most clients, whether they're individuals or institutions, have some sort

459
00:23:40,920 --> 00:23:45,120
Speaker 2: of benchmark, a policy portfolio, some strategic acid allocation that

460
00:23:45,200 --> 00:23:47,640
Speaker 2: they start with. They're typically not starting with just a

461
00:23:47,680 --> 00:23:51,679
Speaker 2: blank piece of paper. It's mister and missus Jones. You

462
00:23:51,720 --> 00:23:54,919
Speaker 2: are sixty forty investors, sixty percent stocks, forty percent bonds.

463
00:23:56,040 --> 00:23:58,479
Speaker 2: But we think that we want to go beyond that

464
00:23:58,560 --> 00:24:02,399
Speaker 2: and introduce diversifying assets or diversifying strategies. It's going to

465
00:24:02,520 --> 00:24:05,240
Speaker 2: use gold as an example. Well, to put gold in

466
00:24:05,280 --> 00:24:08,879
Speaker 2: the portfolio, it's not, it's not just addition. Diversification is

467
00:24:08,880 --> 00:24:10,720
Speaker 2: a problem of addition through subtraction.

468
00:24:11,240 --> 00:24:12,679
Speaker 1: What are you selling in order to buy that?

469
00:24:12,720 --> 00:24:15,680
Speaker 2: I need to make room and that creates two problems.

470
00:24:15,760 --> 00:24:20,640
Speaker 2: The first is it creates a return hurdle problem. Whatever

471
00:24:20,680 --> 00:24:25,360
Speaker 2: I'm selling that gold in this example needs to outperform

472
00:24:26,000 --> 00:24:28,040
Speaker 2: to have that portfolio, or at least keep up with

473
00:24:28,560 --> 00:24:31,200
Speaker 2: over the long run for that portfolio to not underperform

474
00:24:31,200 --> 00:24:33,040
Speaker 2: the benchmark. Right, So if you do that.

475
00:24:33,280 --> 00:24:35,800
Speaker 1: So if you do that, you've even if you've gotten

476
00:24:35,840 --> 00:24:39,000
Speaker 1: the same performance, you've reduced the risk because through the

477
00:24:39,000 --> 00:24:41,199
Speaker 1: addition of a diversifying asset.

478
00:24:41,320 --> 00:24:43,000
Speaker 2: Right, But there's a risk there Let's say I think

479
00:24:43,040 --> 00:24:44,720
Speaker 2: gold is going to keep up with stocks over the

480
00:24:44,720 --> 00:24:47,600
Speaker 2: long run, so I sell my stocks to make room

481
00:24:47,680 --> 00:24:51,160
Speaker 2: for gold, and it doesn't turns out my forecast is wrong. Well,

482
00:24:51,160 --> 00:24:53,720
Speaker 2: there's a real opportunity cost there, right, So you've got

483
00:24:54,000 --> 00:24:57,399
Speaker 2: you've got a modeling hurdle rate that you need to

484
00:24:57,440 --> 00:25:01,919
Speaker 2: figure out when you're adding diversifiers. Is behavioral, and this

485
00:25:02,040 --> 00:25:05,719
Speaker 2: is where most people understand stocks and bonds better than

486
00:25:05,760 --> 00:25:11,200
Speaker 2: they understand alternatives or alternative strategies. Alternatives and alternative strategies

487
00:25:11,240 --> 00:25:14,040
Speaker 2: tend to be less tax efficient, more opaque, and so

488
00:25:15,000 --> 00:25:18,840
Speaker 2: just like stocks can have their lost decades, alternatives often

489
00:25:18,880 --> 00:25:22,439
Speaker 2: have their lost decades, and people are very unwilling to

490
00:25:22,520 --> 00:25:26,359
Speaker 2: stick with those diversifying alternatives during lost decades, which means

491
00:25:26,359 --> 00:25:30,399
Speaker 2: that when the diversification benefits eventually come around, their performance chasing.

492
00:25:30,840 --> 00:25:33,560
Speaker 2: And so you see these huge what are called behavior

493
00:25:33,640 --> 00:25:38,960
Speaker 2: gaps in the returns of alternative investment strategy categories because

494
00:25:38,960 --> 00:25:41,880
Speaker 2: investors aren't sticking with them. So the return that they

495
00:25:41,920 --> 00:25:45,480
Speaker 2: realize what's called the investor return, tends to be hundreds

496
00:25:45,480 --> 00:25:49,199
Speaker 2: of basis points behind the actual investment return. So the

497
00:25:49,280 --> 00:25:51,160
Speaker 2: question is how do we solve this. Well, it turns

498
00:25:51,160 --> 00:25:55,280
Speaker 2: out institutions have solved this problem for forty years using

499
00:25:55,280 --> 00:25:58,960
Speaker 2: this concept of portable alpha, which is to say, well,

500
00:25:59,000 --> 00:26:01,760
Speaker 2: instead of making room in the portfolio, can we use

501
00:26:01,760 --> 00:26:05,920
Speaker 2: some financial engineering to take that alternative and just layer

502
00:26:06,000 --> 00:26:07,520
Speaker 2: it on top of our portfolio.

503
00:26:07,960 --> 00:26:12,440
Speaker 1: In other words, you're using the underlying sixty forty as

504
00:26:12,480 --> 00:26:16,399
Speaker 1: a basis for borrowing in order to add a different

505
00:26:16,440 --> 00:26:17,720
Speaker 1: asset class on top of it. Yeah.

506
00:26:17,760 --> 00:26:19,840
Speaker 2: I think actually the easiest way for most people to

507
00:26:19,920 --> 00:26:22,600
Speaker 2: understand this, without getting into the world of derivatives like

508
00:26:22,640 --> 00:26:24,960
Speaker 2: futures and swaps, is to think about buying a house.

509
00:26:25,840 --> 00:26:27,480
Speaker 2: Let's say Eve a million dollars and you want to

510
00:26:27,480 --> 00:26:29,680
Speaker 2: buy a million dollar house. There's really two ways you

511
00:26:29,720 --> 00:26:31,920
Speaker 2: can do that. You can just go buy the house

512
00:26:31,920 --> 00:26:34,639
Speaker 2: for cash, and then over time your return is just

513
00:26:34,680 --> 00:26:37,359
Speaker 2: equal to the return of the house. Or you can

514
00:26:37,400 --> 00:26:39,320
Speaker 2: go to the bank and get a mortgage. Put two

515
00:26:39,359 --> 00:26:42,879
Speaker 2: hundred thousand dollars down, get an eight hundred thousand dollars mortgage.

516
00:26:43,200 --> 00:26:46,600
Speaker 2: You're going to get the return of the house minus

517
00:26:46,680 --> 00:26:48,600
Speaker 2: whatever the cost of financing is, and then you're going

518
00:26:48,680 --> 00:26:51,440
Speaker 2: to have eight hundred thousand dollars in cash with which

519
00:26:51,520 --> 00:26:54,040
Speaker 2: you can do whatever. If you were to take that

520
00:26:54,040 --> 00:26:57,200
Speaker 2: eight hundred thousand dollars in cash and invest it in, say,

521
00:26:57,359 --> 00:27:00,639
Speaker 2: mortgage backed securities, you'd probably offset your cost off financing,

522
00:27:01,240 --> 00:27:03,760
Speaker 2: and your return there would be equal to your return

523
00:27:04,359 --> 00:27:07,720
Speaker 2: of just buying the house, ignoring taxes. But if I

524
00:27:07,800 --> 00:27:09,199
Speaker 2: were to take the eight hundred thousand dollars and then

525
00:27:09,200 --> 00:27:12,639
Speaker 2: invest it and say gold, well, now my return is

526
00:27:12,640 --> 00:27:14,120
Speaker 2: going to be equal to the return of the house

527
00:27:15,160 --> 00:27:18,760
Speaker 2: minus the mortgage plus gold. I've effectively stacked the return

528
00:27:18,800 --> 00:27:23,080
Speaker 2: of gold on top of my house. We do the

529
00:27:23,119 --> 00:27:28,240
Speaker 2: same concept in institutional portfolio management in portable alpha, but

530
00:27:28,280 --> 00:27:31,040
Speaker 2: instead of using a mortgage, you use derivatives like futures

531
00:27:31,040 --> 00:27:34,199
Speaker 2: and swaps, and instead of replacing a house, you're replacing

532
00:27:35,280 --> 00:27:38,080
Speaker 2: exposure like the S and P five hundred or treasuries,

533
00:27:38,440 --> 00:27:41,439
Speaker 2: where historically it's been really hard to beat the market

534
00:27:41,480 --> 00:27:44,120
Speaker 2: and so it's not worth putting capital at work there.

535
00:27:44,400 --> 00:27:46,040
Speaker 1: So, in other words, you're not owning the S and

536
00:27:46,040 --> 00:27:48,240
Speaker 1: P five hundred, you're owning a derivative that gives you

537
00:27:48,280 --> 00:27:50,720
Speaker 1: the right to approaches the SMP five hundred at a

538
00:27:50,760 --> 00:27:54,720
Speaker 1: specific price that's a fraction of what owning all five

539
00:27:54,760 --> 00:27:57,600
Speaker 1: hundred stocks would cost. And then you take that money,

540
00:27:57,800 --> 00:28:03,960
Speaker 1: that capital and buy other diversifiers and theoretically other holdings

541
00:28:04,000 --> 00:28:06,080
Speaker 1: that will generate above market returns.

542
00:28:06,200 --> 00:28:08,760
Speaker 2: Exactly. So you could say, instead of buying a million

543
00:28:08,800 --> 00:28:11,000
Speaker 2: dollars of the S and P five hundred, I'm going

544
00:28:11,080 --> 00:28:14,119
Speaker 2: to take fifty thousand dollars use it as cash collateral

545
00:28:14,400 --> 00:28:16,960
Speaker 2: to buy S and P five hundred futures a million

546
00:28:17,000 --> 00:28:19,000
Speaker 2: dollars of S and P five hundred futures, which will

547
00:28:19,040 --> 00:28:20,119
Speaker 2: give me the total return.

548
00:28:20,320 --> 00:28:23,040
Speaker 1: So that'll be equivalent. You'll get the same minus whatever

549
00:28:23,080 --> 00:28:24,560
Speaker 1: the cost of the derivative.

550
00:28:24,200 --> 00:28:26,360
Speaker 2: Minus whatever the cost of the derivative is the embedded

551
00:28:26,400 --> 00:28:28,399
Speaker 2: cost of financing, and then I can take the rest

552
00:28:28,400 --> 00:28:31,880
Speaker 2: of that capital and invest it wherever I want. Now,

553
00:28:31,920 --> 00:28:33,560
Speaker 2: you have to be careful here, right, This isn't a

554
00:28:33,600 --> 00:28:36,679
Speaker 2: free lunch. You need to think about the operational risks.

555
00:28:36,720 --> 00:28:40,240
Speaker 2: You need to think about the diversification. This is implicitly leverage.

556
00:28:40,480 --> 00:28:43,040
Speaker 2: Leverage is a tool that accentuates both the good and

557
00:28:43,080 --> 00:28:46,080
Speaker 2: the bad. We want to accentuate the benefits of diversification,

558
00:28:46,200 --> 00:28:48,200
Speaker 2: not double down on the same risk.

559
00:28:48,320 --> 00:28:52,240
Speaker 1: I'm immediate. My immediate thought was, Hey, why can't I

560
00:28:52,360 --> 00:28:55,960
Speaker 1: take that derivative and go all right, if it's going

561
00:28:56,040 --> 00:28:58,960
Speaker 1: to cost me fifty K, why can I go two

562
00:28:59,160 --> 00:29:02,080
Speaker 1: x with three x four? And people do that right,

563
00:29:03,000 --> 00:29:04,320
Speaker 1: which is great until it's not.

564
00:29:04,440 --> 00:29:06,960
Speaker 2: Which is great until it's not right. And so for us,

565
00:29:07,880 --> 00:29:10,320
Speaker 2: when we think about these concept of portable alpha and

566
00:29:10,360 --> 00:29:13,400
Speaker 2: return stacking, we think they are incredibly efficient ways to

567
00:29:13,440 --> 00:29:17,800
Speaker 2: get diversification into your portfolio, to get alternative return streams

568
00:29:17,840 --> 00:29:21,520
Speaker 2: that can both enhance returns and potentially reduce risk. But

569
00:29:21,640 --> 00:29:24,280
Speaker 2: you need to be really careful about what you're introducing,

570
00:29:25,080 --> 00:29:28,920
Speaker 2: particularly because during a liquidity crisis you tend to see

571
00:29:28,960 --> 00:29:31,240
Speaker 2: correlations go to one, and you need to be aware

572
00:29:31,280 --> 00:29:33,000
Speaker 2: of the leverage risk that's embedded.

573
00:29:33,120 --> 00:29:37,320
Speaker 1: So eight oh nine, that sort of portable alpha probably

574
00:29:37,400 --> 00:29:38,080
Speaker 1: didn't do great.

575
00:29:38,720 --> 00:29:40,640
Speaker 2: Yeah, so let's talk about eight oh nine, and let's

576
00:29:40,640 --> 00:29:42,280
Speaker 2: talk about why we don't call this portable alph and

577
00:29:42,320 --> 00:29:47,120
Speaker 2: why we've rebranded it as return stacking. This concept goes

578
00:29:47,120 --> 00:29:50,000
Speaker 2: back to the nineteen eighties with PIMCOH and got really

579
00:29:50,040 --> 00:29:53,520
Speaker 2: popular in the early two thousands. What institutions realized, as

580
00:29:53,560 --> 00:29:55,880
Speaker 2: they said, I mean, you know these stats like the

581
00:29:55,880 --> 00:29:58,400
Speaker 2: back of your hand, it is really hard to beat

582
00:29:58,440 --> 00:30:01,240
Speaker 2: the S and P five hundred. If I have a

583
00:30:01,360 --> 00:30:04,400
Speaker 2: bond benchmark and forty percent of that as treasuries, how

584
00:30:04,400 --> 00:30:05,920
Speaker 2: am I supposed to What am I supposed to do

585
00:30:06,000 --> 00:30:08,480
Speaker 2: with all that dead asset? Well, what I can do

586
00:30:09,320 --> 00:30:12,400
Speaker 2: is I can use derivatives to get that exposure, either

587
00:30:12,440 --> 00:30:15,280
Speaker 2: the SMP five hundred or those treasuries, and then I'll

588
00:30:15,360 --> 00:30:16,680
Speaker 2: use my freed up cash and I'm going to go

589
00:30:16,720 --> 00:30:19,320
Speaker 2: invest in some hedge fund that I think is going

590
00:30:19,400 --> 00:30:22,920
Speaker 2: to give me uncorrelated alpha. Right, maybe the hedge fund

591
00:30:23,000 --> 00:30:27,640
Speaker 2: does relative value volatility trading, something with some sizzle, right right.

592
00:30:28,280 --> 00:30:30,240
Speaker 2: And what's interesting is when you think about it, what

593
00:30:30,360 --> 00:30:31,920
Speaker 2: the math does is I say, okay, I'm getting the

594
00:30:31,920 --> 00:30:33,920
Speaker 2: S and P five hundred beta, and I'm stacking the

595
00:30:33,920 --> 00:30:35,960
Speaker 2: return of this hedge fund on top. And now I

596
00:30:36,000 --> 00:30:38,080
Speaker 2: can sort of That's why it's called portable alph I

597
00:30:38,080 --> 00:30:40,240
Speaker 2: can port the alpha of this hedge fund on top

598
00:30:40,320 --> 00:30:42,640
Speaker 2: of the S and P five hundred instead of fishing

599
00:30:42,680 --> 00:30:45,320
Speaker 2: in the same pond as everyone else. But what happens

600
00:30:45,400 --> 00:30:46,680
Speaker 2: during a crisis.

601
00:30:47,080 --> 00:30:50,600
Speaker 1: Well, everybody has to raise capital because the there's anyone

602
00:30:50,680 --> 00:30:52,560
Speaker 1: with leverage is starting to get margin cross.

603
00:30:52,640 --> 00:30:54,840
Speaker 2: See, you have four big problems that happen in two

604
00:30:54,840 --> 00:30:57,360
Speaker 2: thousand and eight. Your first problem is if you were

605
00:30:57,480 --> 00:30:59,959
Speaker 2: stacking this stuff poorting it on top of the SMPFI

606
00:31:00,040 --> 00:31:02,360
Speaker 2: five hundred and the S and P five hundred lost

607
00:31:02,400 --> 00:31:05,120
Speaker 2: fifty percent from two thousand and seven to the bottom

608
00:31:05,160 --> 00:31:05,960
Speaker 2: in two thousand.

609
00:31:05,720 --> 00:31:08,280
Speaker 1: And nine fifty six and chain fifty six.

610
00:31:08,120 --> 00:31:12,840
Speaker 2: And change, and you only posted five ten percent is collateral.

611
00:31:13,440 --> 00:31:15,959
Speaker 2: You're getting a margin call. So you did better if

612
00:31:15,960 --> 00:31:17,000
Speaker 2: you stacked it on ballns.

613
00:31:17,200 --> 00:31:17,640
Speaker 1: Uh huh.

614
00:31:17,760 --> 00:31:20,000
Speaker 2: Not so wealthy stacked it on equity. So there's one problem.

615
00:31:20,000 --> 00:31:22,400
Speaker 2: Folks who stacked it on equities were getting margin calls. Well,

616
00:31:22,440 --> 00:31:23,680
Speaker 2: what do you do when you get a margin call?

617
00:31:24,640 --> 00:31:27,320
Speaker 2: You rebalance your portfolio. Basically, that's that's what you have

618
00:31:27,360 --> 00:31:30,520
Speaker 2: to do. So what they had they went to all

619
00:31:30,520 --> 00:31:32,840
Speaker 2: the institutions, went to the hedge funds, and the hedge

620
00:31:32,840 --> 00:31:36,080
Speaker 2: funds said, well, well bad news. Not only have we

621
00:31:36,120 --> 00:31:40,000
Speaker 2: lost money too, but we're gating redemptions. You can't have

622
00:31:40,040 --> 00:31:43,200
Speaker 2: your money back. So all of a sudden, they tried

623
00:31:43,200 --> 00:31:45,959
Speaker 2: to rebalance to meet their margin calls, and what they

624
00:31:46,000 --> 00:31:48,160
Speaker 2: had invested their cash and was not giving them their

625
00:31:48,160 --> 00:31:48,680
Speaker 2: cash back.

626
00:31:48,800 --> 00:31:51,720
Speaker 1: And nobody markets this is not portable alpha.

627
00:31:52,000 --> 00:31:56,239
Speaker 2: Right, and so they can't rebalance, they get the margin call,

628
00:31:56,320 --> 00:31:58,800
Speaker 2: they lose the exposure to the beta. The last small

629
00:31:58,840 --> 00:32:01,200
Speaker 2: wrinkle was a lot of this wasn't done with exchange

630
00:32:01,240 --> 00:32:03,400
Speaker 2: drade of futures. It was done with total return swaps

631
00:32:03,440 --> 00:32:05,920
Speaker 2: with banks. And if your counter party was Lehman Brothers,

632
00:32:07,040 --> 00:32:10,560
Speaker 2: even if you handled things perfectly, where does your swap stand?

633
00:32:10,800 --> 00:32:10,920
Speaker 1: Right?

634
00:32:11,080 --> 00:32:13,320
Speaker 2: So as you can imagine post two thousand and eight,

635
00:32:14,240 --> 00:32:18,080
Speaker 2: this concept which was I think if I'm corrected, I

636
00:32:18,080 --> 00:32:20,840
Speaker 2: think it was twenty five percent of major US pensions

637
00:32:20,840 --> 00:32:23,880
Speaker 2: and institutions were implementing portable alpha pre two thousand and eight.

638
00:32:23,960 --> 00:32:26,720
Speaker 2: That that large, that it was a significant amount, and

639
00:32:26,800 --> 00:32:29,280
Speaker 2: at least fifty percent of it when surveyed, we're looking

640
00:32:29,320 --> 00:32:32,239
Speaker 2: to implement portable alpha. Uh huh post two thousand and eight,

641
00:32:32,280 --> 00:32:35,320
Speaker 2: I mean, I think it was called a synthetic risk grenade.

642
00:32:35,600 --> 00:32:39,000
Speaker 2: It just the reputation was destroyed.

643
00:32:38,520 --> 00:32:43,040
Speaker 1: And synthetic risk grenade. That's a great ban a college.

644
00:32:43,480 --> 00:32:49,920
Speaker 2: Absolutely right, absolutely, and and so like many things you

645
00:32:49,960 --> 00:32:52,840
Speaker 2: lived through two thousand and eight, the language was right,

646
00:32:53,000 --> 00:32:55,800
Speaker 2: no derivatives, no shorting, no leverage. I mean that was

647
00:32:55,880 --> 00:32:59,240
Speaker 2: on product brochures at that point, huh, people really didn't

648
00:32:59,280 --> 00:33:02,200
Speaker 2: want to talk about this stuff, and so it sort

649
00:33:02,240 --> 00:33:07,320
Speaker 2: of disappeared. Except there are still institutions that are doing this,

650
00:33:08,840 --> 00:33:12,040
Speaker 2: and they've figured out ways that are much better operationally,

651
00:33:12,600 --> 00:33:14,800
Speaker 2: or they figured out other ways to get the leverage. So,

652
00:33:14,880 --> 00:33:18,720
Speaker 2: for example, private equity, we've seen a huge increase in private.

653
00:33:18,400 --> 00:33:20,400
Speaker 1: Equity trillions, literally trillions.

654
00:33:20,480 --> 00:33:24,040
Speaker 2: Private equity returns are basically just levered public equity returns.

655
00:33:24,200 --> 00:33:24,760
Speaker 1: Uh huh.

656
00:33:24,800 --> 00:33:27,240
Speaker 2: So instead of now me saying, let me get my

657
00:33:27,400 --> 00:33:29,719
Speaker 2: leverage by getting a swap with a bank, I can

658
00:33:29,760 --> 00:33:32,760
Speaker 2: take my public equity get my leverage by taking my

659
00:33:32,760 --> 00:33:35,600
Speaker 2: public equity putting it in private equity. If I put

660
00:33:35,640 --> 00:33:38,600
Speaker 2: twenty cents in, it looks like thirty cents of exposure.

661
00:33:39,000 --> 00:33:40,920
Speaker 2: And I can take some freedop capital and go invest

662
00:33:40,960 --> 00:33:43,200
Speaker 2: in a hedge fund. Now I don't ever get margin

663
00:33:43,240 --> 00:33:46,800
Speaker 2: called anymore and ps on volatility laundering to steal a

664
00:33:46,880 --> 00:33:49,120
Speaker 2: quote from Cliff Astness on the private side, And so

665
00:33:49,160 --> 00:33:51,960
Speaker 2: people have figured out all these very clever ways, and

666
00:33:51,960 --> 00:33:53,640
Speaker 2: I don't mean clever in a bad way, but clever

667
00:33:53,680 --> 00:33:56,680
Speaker 2: ways to keep portable alpha. Because it's a great theoretical

668
00:33:56,720 --> 00:34:00,480
Speaker 2: concept that just had implementation issues in two thousand to

669
00:34:00,600 --> 00:34:04,600
Speaker 2: re implement it very thoughtfully, and folks like Jonathan Clinton,

670
00:34:04,680 --> 00:34:07,920
Speaker 2: who's the CIO of Delta's pension, credits it for taking

671
00:34:08,040 --> 00:34:12,319
Speaker 2: Delta's pension from near bankruptcy to being overfunded in the

672
00:34:12,360 --> 00:34:15,399
Speaker 2: last eight years. He gives full credit to Portable Alpha

673
00:34:15,400 --> 00:34:16,640
Speaker 2: as being the reason why.

674
00:34:16,719 --> 00:34:20,320
Speaker 1: No kidding, that's really that's really interesting. So you mentioned

675
00:34:20,360 --> 00:34:23,480
Speaker 1: private equity. We're not going to talk about private credit

676
00:34:23,520 --> 00:34:26,880
Speaker 1: or private debt. But it's the same sort of continuum

677
00:34:26,920 --> 00:34:32,480
Speaker 1: that Cliff Do I say, complains about volatility laundering. It's like, hey,

678
00:34:32,520 --> 00:34:34,359
Speaker 1: if you don't get a daily mark or a tick

679
00:34:34,400 --> 00:34:38,319
Speaker 1: By tick mark, volatility is irrelevant. We'll let you know

680
00:34:38,360 --> 00:34:42,160
Speaker 1: what it's worth. Sort of sort of thing. But you've

681
00:34:42,360 --> 00:34:49,480
Speaker 1: talked about systematic alternatives. How do you define systematic alternatives?

682
00:34:49,520 --> 00:34:53,880
Speaker 1: And is this the approach that anyone who wants exposures

683
00:34:53,920 --> 00:34:55,280
Speaker 1: to aults should be using.

684
00:34:56,280 --> 00:34:59,600
Speaker 2: So this is where I have my own strong personal view.

685
00:34:59,640 --> 00:35:04,440
Speaker 2: So system matic alternatives to me are active investment strategies

686
00:35:04,480 --> 00:35:08,200
Speaker 2: that are implemented in a non discretionary manner. Right, Probably

687
00:35:08,200 --> 00:35:10,760
Speaker 2: these way to describe systematic tends to be you're using

688
00:35:10,880 --> 00:35:14,240
Speaker 2: computer models to make the decisions and implement the decisions

689
00:35:14,239 --> 00:35:18,319
Speaker 2: on an ongoing basis. These tend to be things like

690
00:35:19,320 --> 00:35:23,320
Speaker 2: strategies that will trade futures contracts long and short based

691
00:35:23,360 --> 00:35:26,400
Speaker 2: on different signals. Those signals might be trend signals, they

692
00:35:26,480 --> 00:35:29,799
Speaker 2: might be carry signals. They might be value or momentum,

693
00:35:30,239 --> 00:35:34,359
Speaker 2: and you're going long and short things like oil or

694
00:35:34,400 --> 00:35:37,600
Speaker 2: gold or Japanese yen, or you might be trading them

695
00:35:37,600 --> 00:35:40,280
Speaker 2: as spreads against one another. And the idea of many

696
00:35:40,280 --> 00:35:43,719
Speaker 2: of these sort of systematic macro strategies is to use

697
00:35:43,760 --> 00:35:47,040
Speaker 2: these signals to capture a lot of the macro trends

698
00:35:47,080 --> 00:35:51,480
Speaker 2: that are unfolding that you know, your big macro traders

699
00:35:51,680 --> 00:35:55,560
Speaker 2: would try to capture in a more discretionary fund. What's really,

700
00:35:55,800 --> 00:35:58,759
Speaker 2: in my opinion, attractive and appealing about them is that

701
00:35:58,800 --> 00:36:02,840
Speaker 2: they tend to be very uncorrelated to equities and bonds

702
00:36:03,120 --> 00:36:07,279
Speaker 2: over the long run, and particularly during a crisis, because

703
00:36:07,280 --> 00:36:11,840
Speaker 2: that's where you often see the opportunities manifest for big

704
00:36:11,960 --> 00:36:15,440
Speaker 2: strong moves, either positive and flight to safety assets or

705
00:36:15,480 --> 00:36:18,400
Speaker 2: the ability to short and profit from things that are crashing.

706
00:36:18,960 --> 00:36:24,560
Speaker 1: Huh. Really intriguing. This kind of ties in with a

707
00:36:24,640 --> 00:36:27,279
Speaker 1: quote of yours that I want to ask later, but

708
00:36:27,320 --> 00:36:30,160
Speaker 1: I might as well bring it back to this risk

709
00:36:30,239 --> 00:36:34,280
Speaker 1: cannot be destroyed, only transformed. Explain.

710
00:36:34,560 --> 00:36:36,480
Speaker 2: I don't think I'm the only person who has said this.

711
00:36:37,800 --> 00:36:40,080
Speaker 2: In fact, I once found a very similar quote in

712
00:36:40,320 --> 00:36:42,279
Speaker 2: an investment book from the nineteen eighty So this is

713
00:36:42,280 --> 00:36:44,839
Speaker 2: not a quote that should be attributed to me. It's

714
00:36:44,840 --> 00:36:47,040
Speaker 2: a general concept, and this is something I actually picked

715
00:36:47,120 --> 00:36:50,680
Speaker 2: up in my graduate school studies when we were going

716
00:36:50,719 --> 00:36:55,919
Speaker 2: through this education of pricing structured products. And what became

717
00:36:55,960 --> 00:36:58,400
Speaker 2: apparent to me is, in many ways, the role of

718
00:36:58,400 --> 00:37:04,640
Speaker 2: the financial industry is to identify risk, extract risk, package it,

719
00:37:04,719 --> 00:37:06,840
Speaker 2: price it, and transfer it to someone who's willing to

720
00:37:06,880 --> 00:37:10,120
Speaker 2: hold it. That is what we do when we raise

721
00:37:10,160 --> 00:37:14,000
Speaker 2: a round of equity financing. Right, you're transferring some risk

722
00:37:14,080 --> 00:37:18,400
Speaker 2: to someone else, so that risk is never really destroyed.

723
00:37:18,400 --> 00:37:21,920
Speaker 2: Everything you do, whether it's in your portfolio or investment

724
00:37:21,920 --> 00:37:24,680
Speaker 2: decisions you make, has a trade off. And sometimes that

725
00:37:25,080 --> 00:37:28,000
Speaker 2: trade off is just an opportunity cost. Sometimes it's very

726
00:37:28,040 --> 00:37:32,239
Speaker 2: explicitly higher volatility or lower downside. But everything we do

727
00:37:32,880 --> 00:37:35,080
Speaker 2: has a trade off. There's really no free launch, right.

728
00:37:35,160 --> 00:37:38,360
Speaker 2: So when I look at something like portable Alpha, I

729
00:37:38,440 --> 00:37:41,680
Speaker 2: say Okay. The opportunity is I don't have to try

730
00:37:41,680 --> 00:37:43,440
Speaker 2: to beat the S and P five hundred by picking

731
00:37:43,440 --> 00:37:46,759
Speaker 2: stocks better, which has historically proven to be largely a

732
00:37:46,800 --> 00:37:49,960
Speaker 2: fool's Errand I can try to beat the SMP by saying, well,

733
00:37:50,040 --> 00:37:52,520
Speaker 2: let me just get the SMP and I think gold

734
00:37:52,760 --> 00:37:55,520
Speaker 2: is just going to be positive over my thirty year horizon.

735
00:37:55,640 --> 00:37:57,920
Speaker 2: Let me just stack some gold on top. Okay, that's

736
00:37:57,960 --> 00:38:01,040
Speaker 2: a win. Where's the risk? Well, again, I'm introduced. I'm

737
00:38:01,120 --> 00:38:04,800
Speaker 2: using leverage. Leverage isn't inherently bad, but there are risks

738
00:38:04,840 --> 00:38:07,880
Speaker 2: that I've now introduced for making this trade off. And

739
00:38:07,920 --> 00:38:11,440
Speaker 2: so yes, I get some diversification benefit, but there's some

740
00:38:11,680 --> 00:38:14,200
Speaker 2: liquidity risks and operational risks I really need to be

741
00:38:14,200 --> 00:38:15,919
Speaker 2: aware of. And so it's to me, it's it's trade

742
00:38:15,920 --> 00:38:17,040
Speaker 2: offs all the way down.

743
00:38:17,560 --> 00:38:21,040
Speaker 1: And it's worked out for places like Delta's pension.

744
00:38:20,680 --> 00:38:24,440
Speaker 2: Funds Delta, there are a large number of public pensions

745
00:38:24,560 --> 00:38:28,399
Speaker 2: as well that have used this ipers Ohio police and

746
00:38:28,520 --> 00:38:32,200
Speaker 2: fire mosers. I mean, this is I want to say,

747
00:38:32,200 --> 00:38:34,279
Speaker 2: like one of the and what's interesting is they don't

748
00:38:34,280 --> 00:38:37,440
Speaker 2: want to talk about it. Oh really, now, the public pensions,

749
00:38:37,560 --> 00:38:39,520
Speaker 2: it's in all their public filings, so you can go

750
00:38:39,640 --> 00:38:42,000
Speaker 2: find this right, but a lot of them don't want

751
00:38:42,040 --> 00:38:44,239
Speaker 2: to talk about it because either hey, this is our

752
00:38:44,440 --> 00:38:45,840
Speaker 2: this is what's working for us, and we need to

753
00:38:45,840 --> 00:38:49,840
Speaker 2: beat our competitors right or again it just portable alpha

754
00:38:49,880 --> 00:38:53,560
Speaker 2: has this bad label to it from two thousand and eight,

755
00:38:54,120 --> 00:38:57,319
Speaker 2: and people don't want to see it, and so they're

756
00:38:57,400 --> 00:38:58,920
Speaker 2: sort of finding ways to hide it.

757
00:38:59,440 --> 00:39:05,840
Speaker 1: So we'll talk about return stacking in a moment, but

758
00:39:05,920 --> 00:39:08,560
Speaker 1: I want to stay with some of the research that

759
00:39:08,600 --> 00:39:14,440
Speaker 1: you did, and let's talk about liquidy cascades, which our

760
00:39:14,520 --> 00:39:18,759
Speaker 1: mutual friend Dave Natick has described a new lens on

761
00:39:18,880 --> 00:39:22,319
Speaker 1: reality that I think people should be thinking about. I

762
00:39:22,360 --> 00:39:28,440
Speaker 1: love that description. Tell us what your liquidity cascade work found.

763
00:39:29,000 --> 00:39:32,520
Speaker 2: So this was research I wrote in twenty twenty after

764
00:39:32,560 --> 00:39:35,600
Speaker 2: coming out of the twenty twenty crisis, and it was

765
00:39:36,200 --> 00:39:38,919
Speaker 2: born from the view that while there was a very

766
00:39:39,080 --> 00:39:44,319
Speaker 2: real exogenous economic event that caused the market to sell off,

767
00:39:45,040 --> 00:39:47,440
Speaker 2: the day to day of what I was seeing happening

768
00:39:47,520 --> 00:39:52,040
Speaker 2: in markets seemed to be endogenous. In other words, there

769
00:39:52,160 --> 00:39:55,760
Speaker 2: was so much volatility and there was so much mispricing

770
00:39:55,840 --> 00:39:59,920
Speaker 2: that didn't seem to be a reaction to fundamental changes

771
00:40:00,120 --> 00:40:02,600
Speaker 2: the world. It just seemed to be, Oh, there's someone

772
00:40:02,600 --> 00:40:05,120
Speaker 2: got liquidated and had to sell immediately, sell down a

773
00:40:05,200 --> 00:40:07,640
Speaker 2: large levered position, and there's someone who couldn't meet a

774
00:40:07,640 --> 00:40:10,920
Speaker 2: collateral call. And so it made me take a step

775
00:40:10,960 --> 00:40:14,440
Speaker 2: back and say, is there something about the market structure,

776
00:40:14,960 --> 00:40:19,719
Speaker 2: the way market micro structure has evolved over time that

777
00:40:19,880 --> 00:40:22,920
Speaker 2: I don't understand that there are some of these maybe

778
00:40:23,000 --> 00:40:27,160
Speaker 2: lurking risks that we've implemented. And so there were three

779
00:40:28,719 --> 00:40:30,640
Speaker 2: I'm gonna call them conspiracy theories for lack of a

780
00:40:30,640 --> 00:40:32,680
Speaker 2: better word, that the hang out there as to what

781
00:40:32,840 --> 00:40:33,879
Speaker 2: has broken.

782
00:40:33,560 --> 00:40:36,719
Speaker 1: The market rationalization rationalizations, Yeah, to.

783
00:40:36,640 --> 00:40:38,560
Speaker 2: Be kind to the people that believe them, And so

784
00:40:38,600 --> 00:40:40,319
Speaker 2: the idea of the paper was I was going to

785
00:40:40,440 --> 00:40:44,960
Speaker 2: explore them as objectively as I could. The big three

786
00:40:45,080 --> 00:40:48,360
Speaker 2: as I saw them, were FED intervention and a decade

787
00:40:48,360 --> 00:40:51,319
Speaker 2: of zero interest rate policy causing people to take on

788
00:40:51,400 --> 00:40:55,359
Speaker 2: too much risk, forcing them up the risk curve there was,

789
00:40:56,040 --> 00:40:58,399
Speaker 2: and then obviously the concept of a FED put being

790
00:40:58,440 --> 00:41:00,279
Speaker 2: tied in there. Then there was the right as a

791
00:41:00,320 --> 00:41:05,240
Speaker 2: passive investing not just active versus passive in the type

792
00:41:05,239 --> 00:41:08,480
Speaker 2: of price discovery that was happening, but truly how we

793
00:41:08,640 --> 00:41:13,080
Speaker 2: trade indexed products at a market micro structure level was

794
00:41:13,080 --> 00:41:17,160
Speaker 2: that changing stocks aren't traded individually anymore. They're traded as

795
00:41:17,200 --> 00:41:20,840
Speaker 2: big baskets the way market makers are. There's now really

796
00:41:20,880 --> 00:41:22,799
Speaker 2: just a handful of big market makers rather than a

797
00:41:22,840 --> 00:41:25,120
Speaker 2: large cohort. Is that making markets more fragile? And then

798
00:41:26,000 --> 00:41:29,799
Speaker 2: the impact of derivatives? Right? And I think we saw

799
00:41:29,880 --> 00:41:33,480
Speaker 2: this as an example for people with game Stop, where

800
00:41:33,520 --> 00:41:36,640
Speaker 2: you had what I would call social gamma, this acceleration

801
00:41:36,840 --> 00:41:39,239
Speaker 2: through Reddit of people buying out of the money call

802
00:41:39,280 --> 00:41:44,520
Speaker 2: options to drive through leverage, the price higher because market

803
00:41:44,520 --> 00:41:47,319
Speaker 2: makers were forced to hedge. Right. Do you see that

804
00:41:47,719 --> 00:41:49,520
Speaker 2: less specifically at game Stop, But do you see that

805
00:41:49,560 --> 00:41:52,800
Speaker 2: at a grander scale when you have a huge amount

806
00:41:52,840 --> 00:41:56,759
Speaker 2: of structured products being issued in Asia and Europe, or

807
00:41:56,840 --> 00:42:01,200
Speaker 2: you have all these sort of uses of leverage among institutions?

808
00:42:01,280 --> 00:42:04,360
Speaker 2: Have we gotten again to a point of fragility? And

809
00:42:04,800 --> 00:42:09,400
Speaker 2: what liquidity Cascades ultimately argued was anyone who thinks it

810
00:42:09,440 --> 00:42:12,759
Speaker 2: was just their one thesis was probably wrong it.

811
00:42:12,960 --> 00:42:15,000
Speaker 1: Now I want to just stop you for a second,

812
00:42:15,040 --> 00:42:18,360
Speaker 1: interrupt you for a second and point out how often

813
00:42:18,680 --> 00:42:25,000
Speaker 1: are big complicated situations, you know, Jacques cu'es it's that

814
00:42:25,160 --> 00:42:27,879
Speaker 1: one thing. The world is much more complex than that.

815
00:42:28,360 --> 00:42:31,480
Speaker 1: It's I remember looking at the causes of the financial crisis.

816
00:42:31,520 --> 00:42:35,200
Speaker 1: I found dozens of them. When the inflation surge took

817
00:42:35,320 --> 00:42:38,440
Speaker 1: up in twenty one and twenty two, like people wanted

818
00:42:38,440 --> 00:42:42,439
Speaker 1: to point a finger, there were dozens of factors, including

819
00:42:42,640 --> 00:42:45,800
Speaker 1: consumers who said, oh, that's fifty percent more. Yeah, I

820
00:42:45,800 --> 00:42:48,719
Speaker 1: don't care, I'm gonna buy one. Consumers drove inflation as

821
00:42:48,800 --> 00:42:51,960
Speaker 1: much as fiscal stimulus and all these other things. So

822
00:42:52,560 --> 00:42:57,120
Speaker 1: how how broad a conclusion did you reach that it's

823
00:42:57,200 --> 00:42:58,200
Speaker 1: never just one thing?

824
00:42:59,239 --> 00:43:02,400
Speaker 2: To your point, I think people look into a world

825
00:43:02,480 --> 00:43:07,000
Speaker 2: of incredibly complex nonlinear relationships and they want a single

826
00:43:07,440 --> 00:43:10,280
Speaker 2: linear explanation and it's just not possible.

827
00:43:10,400 --> 00:43:14,120
Speaker 1: That's the narrative fallacy. They want to clean little storyline

828
00:43:14,120 --> 00:43:16,960
Speaker 1: in a bow, and that's not how the universe.

829
00:43:16,600 --> 00:43:18,799
Speaker 2: Wor all of these things interact. And so what I

830
00:43:18,880 --> 00:43:22,239
Speaker 2: came out of the research piece with was not my view.

831
00:43:22,520 --> 00:43:24,480
Speaker 2: Actually the intro of the research piece, I said, I'm

832
00:43:24,480 --> 00:43:26,480
Speaker 2: not going to tell you what my view is. I'm

833
00:43:26,520 --> 00:43:29,000
Speaker 2: going to walk through this objectively as I can, and

834
00:43:29,040 --> 00:43:31,120
Speaker 2: I'm going to paint a picture at the end, it's

835
00:43:31,160 --> 00:43:34,000
Speaker 2: up to you as the reader to determine, for lack

836
00:43:34,000 --> 00:43:37,560
Speaker 2: of a better phrase, how full I am right, you know, so.

837
00:43:37,480 --> 00:43:39,360
Speaker 1: What did you find out with those three facts? Or

838
00:43:39,360 --> 00:43:43,359
Speaker 1: those three so the FED, passive and derivatives.

839
00:43:43,440 --> 00:43:46,200
Speaker 2: So with those three factors, what I ultimately argued was

840
00:43:46,239 --> 00:43:50,400
Speaker 2: that they operate in somewhat of a cycle. Right, FED

841
00:43:50,520 --> 00:43:54,560
Speaker 2: zero interest rate policy is in many ways, as explicitly

842
00:43:54,600 --> 00:43:57,560
Speaker 2: stated by the FED, trying to move people up the

843
00:43:57,600 --> 00:44:00,000
Speaker 2: risk curve. And as people moved up the risk curve,

844
00:44:00,280 --> 00:44:03,400
Speaker 2: they were trying to find ways to harvest yield or

845
00:44:03,440 --> 00:44:07,239
Speaker 2: save money, a move into things like passive thing, a

846
00:44:07,280 --> 00:44:10,959
Speaker 2: move into tax efficient vehicles like ETFs. That we're having

847
00:44:11,040 --> 00:44:13,600
Speaker 2: a profound impact on the way things are traded in

848
00:44:13,640 --> 00:44:17,000
Speaker 2: the market. You're having a consolidation of market makers that

849
00:44:17,160 --> 00:44:22,120
Speaker 2: leads to potentially increasing fragility or or lack of liquidity.

850
00:44:22,200 --> 00:44:24,799
Speaker 2: One of the things I thought was really interesting in

851
00:44:24,800 --> 00:44:27,239
Speaker 2: March twenty twenties. People always talk about market makers pull

852
00:44:27,280 --> 00:44:30,800
Speaker 2: the plug right right, markets go crazy. They're not running

853
00:44:30,840 --> 00:44:33,239
Speaker 2: a charity. They're going to pull the plug when things

854
00:44:33,280 --> 00:44:34,400
Speaker 2: aren't going well.

855
00:44:34,160 --> 00:44:36,799
Speaker 1: Or at least lower their their bidass spread wide them out,

856
00:44:36,880 --> 00:44:37,440
Speaker 1: So yeah.

857
00:44:37,239 --> 00:44:38,440
Speaker 2: They're going to wide them out and they're going to

858
00:44:38,440 --> 00:44:41,480
Speaker 2: thin the order book volume. What I thought was interesting

859
00:44:41,480 --> 00:44:45,960
Speaker 2: that people don't often talk about is they're actually capacity constrained.

860
00:44:46,560 --> 00:44:50,239
Speaker 2: They have a balance sheet, and there was I think

861
00:44:50,239 --> 00:44:54,239
Speaker 2: it was Vertu during March twenty twenty that actually was

862
00:44:54,280 --> 00:44:56,840
Speaker 2: trying to raise three hundred and fifty million dollars just

863
00:44:56,880 --> 00:44:59,040
Speaker 2: so they could keep making markets wow because they had

864
00:44:59,080 --> 00:45:01,920
Speaker 2: run out of balance sheet. And you go, well, actually,

865
00:45:01,920 --> 00:45:04,520
Speaker 2: if these institutions are so important to the way our

866
00:45:04,560 --> 00:45:07,680
Speaker 2: markets function, should they have a line to the Fed?

867
00:45:08,520 --> 00:45:10,280
Speaker 1: Yeah, that makes sense, right.

868
00:45:10,120 --> 00:45:12,239
Speaker 2: I've never heard anyone talk about it, right, right, But

869
00:45:12,320 --> 00:45:14,440
Speaker 2: if you need them there and there's only three or

870
00:45:14,440 --> 00:45:17,680
Speaker 2: four key market makers left, right, we need to make

871
00:45:17,680 --> 00:45:20,840
Speaker 2: sure that they have healthy balancees. They are systematically important

872
00:45:20,840 --> 00:45:21,680
Speaker 2: institutions that.

873
00:45:21,600 --> 00:45:25,720
Speaker 1: They need a line somewhere. But the Fed's mandate isn't

874
00:45:25,800 --> 00:45:29,360
Speaker 1: the smooth operation of the NICY. The Fed's mandate is

875
00:45:29,520 --> 00:45:31,200
Speaker 1: low inflation and full employment.

876
00:45:31,840 --> 00:45:34,680
Speaker 2: So it's a little little struck things like that. And

877
00:45:34,920 --> 00:45:36,800
Speaker 2: again I don't think any of them are the cause,

878
00:45:36,880 --> 00:45:39,600
Speaker 2: but you start to see some of this fragility creep up,

879
00:45:39,719 --> 00:45:42,919
Speaker 2: and then as people right are moving up the risk curve,

880
00:45:42,920 --> 00:45:46,680
Speaker 2: They're trying to find ways to also protect themselves, so

881
00:45:46,719 --> 00:45:49,720
Speaker 2: they're taking on more derivative strategies. We saw this massive

882
00:45:49,719 --> 00:45:53,520
Speaker 2: boom and derivatives. We saw an adoption of things leverage

883
00:45:53,520 --> 00:45:58,040
Speaker 2: strategies with parity and trend following and alternatives. And again

884
00:45:58,080 --> 00:45:59,680
Speaker 2: I don't look at the boogeyman and say the market

885
00:45:59,760 --> 00:46:02,080
Speaker 2: sell off and it's risk parody's fault. But I look

886
00:46:02,120 --> 00:46:05,600
Speaker 2: at I say, well, if risk parity and managed futures

887
00:46:05,600 --> 00:46:08,200
Speaker 2: are selling off, and at the same time, you have

888
00:46:08,239 --> 00:46:12,800
Speaker 2: all these massively levered positions via puts that market makers

889
00:46:12,800 --> 00:46:15,760
Speaker 2: are having to hedge, all that can act in coordination

890
00:46:15,840 --> 00:46:19,759
Speaker 2: to make a sell off more violent. And then sort

891
00:46:19,800 --> 00:46:21,839
Speaker 2: of you go full circle to the FED stepping back

892
00:46:21,880 --> 00:46:24,759
Speaker 2: in lowering interest rates and kicking the whole cycle off.

893
00:46:24,800 --> 00:46:26,400
Speaker 2: And so what I painted a picture of at the end,

894
00:46:26,400 --> 00:46:28,520
Speaker 2: the reason I called it a liquidity cascade was I

895
00:46:28,520 --> 00:46:30,920
Speaker 2: painted it was this empty Escher painting.

896
00:46:30,560 --> 00:46:34,040
Speaker 1: Of famous Wall the waterfall, and.

897
00:46:34,000 --> 00:46:36,640
Speaker 2: Then it magically climbs back up and each part of

898
00:46:36,680 --> 00:46:38,759
Speaker 2: this it was the FED sort of is at the

899
00:46:38,800 --> 00:46:43,480
Speaker 2: bottom of the waterfall, and then flight to passive alternative

900
00:46:43,520 --> 00:46:46,360
Speaker 2: sort of investment strategies and the role of derivatives is

901
00:46:46,400 --> 00:46:49,600
Speaker 2: at the top, and then some exogenous effect causes the

902
00:46:49,640 --> 00:46:52,960
Speaker 2: market to crash, the crash becomes more violent, fed steps

903
00:46:53,000 --> 00:46:54,440
Speaker 2: in and the cycle kicks off again.

904
00:46:54,560 --> 00:47:00,239
Speaker 1: So I have so many interesting questions for you. I'm

905
00:47:00,320 --> 00:47:04,200
Speaker 1: kind of fascinated by your the way you look at

906
00:47:04,239 --> 00:47:08,520
Speaker 1: the market structure and what's driving things, because for me,

907
00:47:08,880 --> 00:47:13,960
Speaker 1: the thing I'm looking at during those various processes is,

908
00:47:14,239 --> 00:47:17,800
Speaker 1: and you reference this earlier are is all the individual

909
00:47:17,840 --> 00:47:21,640
Speaker 1: decision making that takes place within the context of some

910
00:47:22,160 --> 00:47:26,400
Speaker 1: financial stress, which, as we've seen, tends to lead to

911
00:47:27,760 --> 00:47:33,480
Speaker 1: cognitive challenges, behavioral problems, bad decision making. That human element

912
00:47:33,560 --> 00:47:37,120
Speaker 1: in the middle tends to react. You know, it's it's

913
00:47:37,160 --> 00:47:41,359
Speaker 1: oversimplifying it, calling it fight or flight. But hey, that's

914
00:47:41,400 --> 00:47:44,120
Speaker 1: what your lizard brain is telling you. And it doesn't

915
00:47:44,120 --> 00:47:46,239
Speaker 1: matter if you're running a billion dollar hedge fund or

916
00:47:46,360 --> 00:47:50,800
Speaker 1: pension fund. Most people are gonna go through the same

917
00:47:50,880 --> 00:47:55,120
Speaker 1: sort of panicky response. It's really interesting that you're focusing

918
00:47:55,200 --> 00:47:59,400
Speaker 1: on the structure and how does the structure accommodate the

919
00:47:59,440 --> 00:48:00,759
Speaker 1: bad behave that we.

920
00:48:00,680 --> 00:48:04,799
Speaker 2: See you are right that there is absolutely panic and

921
00:48:04,880 --> 00:48:06,879
Speaker 2: lizard brain and I don't mean that in any sort

922
00:48:06,920 --> 00:48:10,480
Speaker 2: of derogatory way. If their survival instincts of actually it

923
00:48:10,560 --> 00:48:12,440
Speaker 2: is what it is, I don't think they're irrational. I

924
00:48:12,440 --> 00:48:15,759
Speaker 2: think ergodicity economics would argue you have to protect your

925
00:48:15,760 --> 00:48:20,239
Speaker 2: capital to survive. What So I'll give an example here

926
00:48:20,440 --> 00:48:22,960
Speaker 2: of where I think it's a very specific example, sort

927
00:48:22,960 --> 00:48:24,560
Speaker 2: of like the market maker's example, but it's something that

928
00:48:24,560 --> 00:48:28,040
Speaker 2: happened in March twenty twenty that is obviously wrong. And

929
00:48:28,680 --> 00:48:33,759
Speaker 2: so Vanguard has their mutual funds, and they offer ETFs

930
00:48:33,800 --> 00:48:36,600
Speaker 2: as a share class of their mutual funds. So if

931
00:48:36,640 --> 00:48:38,759
Speaker 2: you buy the mutual fund or the ETF, you are,

932
00:48:38,760 --> 00:48:41,640
Speaker 2: in theory getting the exact same return because it's the

933
00:48:41,680 --> 00:48:42,880
Speaker 2: same underlying pool of.

934
00:48:42,880 --> 00:48:46,440
Speaker 1: Capital minus the tax advantage of the ETF.

935
00:48:46,440 --> 00:48:51,520
Speaker 2: Absolutely yep, their bond fund. During March twenty twenty, there

936
00:48:51,560 --> 00:48:54,160
Speaker 2: was a two day period where the ETF traded I

937
00:48:54,200 --> 00:48:56,200
Speaker 2: believe it was up to a six or seven percent

938
00:48:56,360 --> 00:49:00,680
Speaker 2: discount to the mutual fund. That's a little weird because

939
00:49:00,680 --> 00:49:02,520
Speaker 2: it's the exact same pool of capital.

940
00:49:02,680 --> 00:49:05,800
Speaker 1: Right, So difference being you can only trade mutual funds.

941
00:49:06,200 --> 00:49:07,759
Speaker 1: At the end of the day, you have to make

942
00:49:07,800 --> 00:49:11,520
Speaker 1: a specific phone call to buy or or just reach

943
00:49:11,560 --> 00:49:13,360
Speaker 1: out to whoever your custodian is.

944
00:49:13,560 --> 00:49:13,759
Speaker 2: Yep.

945
00:49:14,239 --> 00:49:16,200
Speaker 1: Whereas the ETFs are quoted.

946
00:49:16,400 --> 00:49:18,520
Speaker 2: In today, but even at the end of day M

947
00:49:19,320 --> 00:49:22,400
Speaker 2: that discrepancy existed. It wasn't just interday that was. That

948
00:49:22,520 --> 00:49:24,799
Speaker 2: was the NAB of the mutual fund versus the price

949
00:49:24,800 --> 00:49:25,920
Speaker 2: of the ETF.

950
00:49:25,560 --> 00:49:27,799
Speaker 1: Which had a higher trading volume. I'm going to guess

951
00:49:27,840 --> 00:49:28,440
Speaker 1: the ETF.

952
00:49:28,800 --> 00:49:31,880
Speaker 2: The ETF certainly had a higher trading volume, but the

953
00:49:32,320 --> 00:49:38,120
Speaker 2: underlying problem is that the bonds weren't pricing. The bond

954
00:49:38,160 --> 00:49:41,120
Speaker 2: market froze up, so when the mutual fund struck NAB

955
00:49:41,160 --> 00:49:43,680
Speaker 2: at the end of the day, the NAB was based

956
00:49:43,719 --> 00:49:46,759
Speaker 2: on ill liquid quotes of bonds that hadn't traded. The

957
00:49:46,800 --> 00:49:51,359
Speaker 2: ETF was basically saying, we don't believe those quotes. We

958
00:49:51,400 --> 00:49:53,080
Speaker 2: think the quote should be much lower, and we're going

959
00:49:53,120 --> 00:49:53,919
Speaker 2: to price much lower.

960
00:49:53,960 --> 00:49:54,399
Speaker 1: That's right.

961
00:49:54,440 --> 00:49:58,279
Speaker 2: There's an interesting free option here. If you are a vanguard.

962
00:49:58,280 --> 00:50:01,000
Speaker 1: By the ETF seldomctual.

963
00:50:00,320 --> 00:50:03,719
Speaker 2: Funds well, so because you can't short a mutual fund.

964
00:50:03,719 --> 00:50:05,480
Speaker 2: The way it would work is you would just always

965
00:50:05,520 --> 00:50:08,640
Speaker 2: hold the mutual fund, wait for a crisis to come around,

966
00:50:08,719 --> 00:50:11,760
Speaker 2: and then jump from the mutual fund to the ETF, right,

967
00:50:12,320 --> 00:50:15,560
Speaker 2: and you basically pick up this free spread based on

968
00:50:15,640 --> 00:50:19,840
Speaker 2: the fact that the mutual fund is priced incorrectly. Stuff

969
00:50:19,840 --> 00:50:20,840
Speaker 2: like that shouldn't happen.

970
00:50:21,320 --> 00:50:23,880
Speaker 1: Why do you say that, I always go back and

971
00:50:23,920 --> 00:50:29,120
Speaker 1: forth with this. It's not like computers and algorithms are

972
00:50:29,200 --> 00:50:34,080
Speaker 1: running this. It's irrational primates who are pushing the cell

973
00:50:34,239 --> 00:50:35,200
Speaker 1: or buy button.

974
00:50:35,320 --> 00:50:38,120
Speaker 2: Let me rephrase that. Things like that don't happen except

975
00:50:38,160 --> 00:50:41,480
Speaker 2: within a crisis, okay, and they represent opportunity in a

976
00:50:41,520 --> 00:50:47,440
Speaker 2: crisis because it is definitively mispriced, and if markets are efficient,

977
00:50:47,560 --> 00:50:50,120
Speaker 2: there shouldn't be miss pricings like that. That's a very

978
00:50:50,160 --> 00:50:52,920
Speaker 2: You shouldn't have two things that are literally the exact

979
00:50:52,920 --> 00:50:56,520
Speaker 2: same basket attached to the same underlying trading six percent apart.

980
00:50:56,640 --> 00:51:00,719
Speaker 2: Unless there's true limits to arbitrage here. You could argue

981
00:51:00,719 --> 00:51:02,480
Speaker 2: you can't short the mutual fund and buy the ETF.

982
00:51:02,480 --> 00:51:06,040
Speaker 2: It's it's hard to arm that spread. But again, anyone

983
00:51:06,160 --> 00:51:10,000
Speaker 2: trading any bond mutual fund could have jumped to Vanguard's ETF,

984
00:51:10,200 --> 00:51:13,520
Speaker 2: waited for the price appreciation, and benefited. And again, in

985
00:51:13,560 --> 00:51:15,800
Speaker 2: a crisis, there's so much information coming at you you

986
00:51:15,880 --> 00:51:18,400
Speaker 2: might not have seen the opportunity. But I look at

987
00:51:18,440 --> 00:51:20,279
Speaker 2: a lot of little things like that, and I go,

988
00:51:20,560 --> 00:51:24,040
Speaker 2: markets mostly function correctly the vast majority of the time.

989
00:51:24,480 --> 00:51:27,480
Speaker 2: But when you see that fragility pop up in a crisis,

990
00:51:27,600 --> 00:51:30,000
Speaker 2: uh huh, just is it pause for concern about how

991
00:51:30,000 --> 00:51:31,800
Speaker 2: things are currently structured? Just a question.

992
00:51:32,120 --> 00:51:37,439
Speaker 1: So I'm not saying it's broken. So to response to that, first, hey,

993
00:51:37,520 --> 00:51:42,800
Speaker 1: give the Nobel Prize Committee props for offering a prize

994
00:51:42,880 --> 00:51:46,399
Speaker 1: to Fama and Schiller the same year. It's like, yeah,

995
00:51:46,520 --> 00:51:50,279
Speaker 1: markets are mostly efficient. Fama is right except when they're not,

996
00:51:50,600 --> 00:51:54,359
Speaker 1: and Schiller's right. So that's number one. Number two. I

997
00:51:54,400 --> 00:51:58,040
Speaker 1: have a vivid recollection of sitting in a canoe with

998
00:51:58,200 --> 00:52:02,640
Speaker 1: Jim Bianco in August of nine, and Bianca was the

999
00:52:02,760 --> 00:52:07,960
Speaker 1: first person to describe the FED response to the crisis

1000
00:52:08,000 --> 00:52:13,239
Speaker 1: as the first person I read, and this was really early. Hey,

1001
00:52:13,320 --> 00:52:16,680
Speaker 1: the FED has made cash trash. They want you out

1002
00:52:16,680 --> 00:52:20,200
Speaker 1: of bonds, they want you into equities. Maybe it's gonna

1003
00:52:20,239 --> 00:52:23,600
Speaker 1: take people a while to figure this out. But he

1004
00:52:23,719 --> 00:52:26,879
Speaker 1: was the first person to come up with Tina right

1005
00:52:26,960 --> 00:52:30,120
Speaker 1: and said, people are gonna have to stampede into equities.

1006
00:52:30,640 --> 00:52:33,520
Speaker 1: We're gonna have a rally, and I said, it's funny.

1007
00:52:33,760 --> 00:52:35,400
Speaker 1: I feel like the two of us are part of

1008
00:52:35,440 --> 00:52:38,960
Speaker 1: the six blind men describing the elephant. Because to your

1009
00:52:39,080 --> 00:52:44,439
Speaker 1: point about mispricing, I recall saying to him, I don't

1010
00:52:44,480 --> 00:52:47,360
Speaker 1: know if you're right. I like that theory. But my

1011
00:52:49,120 --> 00:52:52,279
Speaker 1: day job as a market historian is whenever stocks are

1012
00:52:52,320 --> 00:52:55,400
Speaker 1: cut in half in the United States, that's a fantastic

1013
00:52:55,560 --> 00:52:58,200
Speaker 1: entry point. And if you bring up well, what about

1014
00:52:58,280 --> 00:53:01,280
Speaker 1: nineteen twenty nine. Yeah, you didn't get to the bottom

1015
00:53:01,400 --> 00:53:03,759
Speaker 1: till thirty two, but even down fifty percent on the

1016
00:53:03,760 --> 00:53:07,799
Speaker 1: way down to down eighty seven percent was still a

1017
00:53:07,840 --> 00:53:11,799
Speaker 1: great entry point. And that's the exception. Every other time

1018
00:53:11,840 --> 00:53:14,080
Speaker 1: you're cut in half in the United States, you have

1019
00:53:14,160 --> 00:53:15,520
Speaker 1: to buy with both hands.

1020
00:53:15,840 --> 00:53:17,600
Speaker 2: Well, and what's interesting to me there is you and

1021
00:53:17,680 --> 00:53:21,920
Speaker 2: Jim are discussing. I love your analogy with the blindman

1022
00:53:22,000 --> 00:53:25,800
Speaker 2: and the elephant. Jim is discussing a supply and demand concept,

1023
00:53:25,840 --> 00:53:27,879
Speaker 2: and you're discussing a fundamental view.

1024
00:53:28,040 --> 00:53:30,640
Speaker 1: Right. I see the world through a behavioral lens. He's

1025
00:53:30,680 --> 00:53:33,560
Speaker 1: seeing the world with. There's the FED is going to

1026
00:53:33,600 --> 00:53:37,400
Speaker 1: cause a giant increase in demand for equity is regardless

1027
00:53:37,400 --> 00:53:39,440
Speaker 1: of what the supply is right, and guess what happens the.

1028
00:53:39,440 --> 00:53:42,919
Speaker 2: Prices, and that'll drive prices up, and it causes many

1029
00:53:43,480 --> 00:53:47,160
Speaker 2: fundamental people right to say markets are overvalued, missing the

1030
00:53:47,200 --> 00:53:50,840
Speaker 2: fact that you had another market structure changed things like

1031
00:53:50,840 --> 00:53:53,080
Speaker 2: a four to oh one k that was almost non

1032
00:53:53,080 --> 00:53:55,720
Speaker 2: existent in the early two thousands. That's several trillion dollars.

1033
00:53:55,760 --> 00:53:58,600
Speaker 2: Now you just have a stamp ped of buying every

1034
00:53:58,640 --> 00:54:02,439
Speaker 2: single month and people being forced into markets as a

1035
00:54:02,480 --> 00:54:06,279
Speaker 2: retirement vehicle, right, that is their savings account, particularly when

1036
00:54:06,320 --> 00:54:10,080
Speaker 2: cash is returning nothing, and you have a dramatic shift

1037
00:54:10,160 --> 00:54:12,000
Speaker 2: in supply and demand. And by the way, over the

1038
00:54:12,000 --> 00:54:16,520
Speaker 2: same cycle, you saw fewer IPOs, so you're increasing demand

1039
00:54:16,520 --> 00:54:18,960
Speaker 2: into public equities with fewer less supply.

1040
00:54:19,400 --> 00:54:22,800
Speaker 1: Right at the same time, you have huge buybacks. Right.

1041
00:54:23,239 --> 00:54:25,080
Speaker 1: A lot of people don't realize the wilsh of five

1042
00:54:25,120 --> 00:54:28,000
Speaker 1: thousand is something like thirty four hundred stocks. It's like

1043
00:54:28,440 --> 00:54:32,600
Speaker 1: totally misnamed. And the past twenty years have seen Yeah,

1044
00:54:32,600 --> 00:54:35,160
Speaker 1: there's been a lot of stock issue in Silicon Valley,

1045
00:54:35,400 --> 00:54:38,680
Speaker 1: but overall, the size of the share float that's out

1046
00:54:38,680 --> 00:54:43,040
Speaker 1: there has shrunk another big and I don't know where

1047
00:54:43,160 --> 00:54:45,759
Speaker 1: what the endgame of that is. Can you do that perpetually.

1048
00:54:46,160 --> 00:54:50,719
Speaker 1: So I don't know what the deep public eyes public markets.

1049
00:54:50,880 --> 00:54:53,320
Speaker 2: I don't know what the endgame of any of this is, Caniley,

1050
00:54:53,360 --> 00:54:55,960
Speaker 2: But I know you've had folks like Mike green On

1051
00:54:56,280 --> 00:54:58,400
Speaker 2: I think he was on even recently, who have strong

1052
00:54:58,480 --> 00:55:01,840
Speaker 2: views about what Passive is doing. I don't have particularly

1053
00:55:01,880 --> 00:55:04,600
Speaker 2: strong views in any direction. I just like asking the questions.

1054
00:55:04,600 --> 00:55:06,640
Speaker 2: Maybe I lob out a little grenade and let other

1055
00:55:06,680 --> 00:55:09,279
Speaker 2: people fight over it, but I think they're fascinating and

1056
00:55:09,400 --> 00:55:13,000
Speaker 2: worthwhile questions because I think in many cases we just

1057
00:55:13,080 --> 00:55:16,800
Speaker 2: accept we have some of the most wonderfully functioning liquid

1058
00:55:16,840 --> 00:55:19,279
Speaker 2: markets in the world. We are truly privileged in the

1059
00:55:19,400 --> 00:55:23,440
Speaker 2: US to have what we have. I don't think it

1060
00:55:23,560 --> 00:55:26,520
Speaker 2: hurts us to ask are we overlooking anything? Is there

1061
00:55:26,520 --> 00:55:31,279
Speaker 2: any way in which we are unintentionally designing ourselves into

1062
00:55:31,320 --> 00:55:32,280
Speaker 2: a state of fragility?

1063
00:55:32,680 --> 00:55:35,640
Speaker 1: It was pretty clear that people should have been asking

1064
00:55:35,640 --> 00:55:38,719
Speaker 1: that question in the mid two thousands and just had

1065
00:55:38,760 --> 00:55:43,880
Speaker 1: no idea the sort of miss aligned incentives and really

1066
00:55:43,920 --> 00:55:48,520
Speaker 1: complex structures that, along with some the really we got

1067
00:55:48,640 --> 00:55:52,360
Speaker 1: used to zero. But when Greenspan post nine to eleven

1068
00:55:52,400 --> 00:55:56,359
Speaker 1: took rates down to under two percent for three years

1069
00:55:56,360 --> 00:55:59,439
Speaker 1: and under one percent for a year that was really

1070
00:55:59,480 --> 00:56:02,719
Speaker 1: we hadn't seen anything like that for decades and decades

1071
00:56:03,280 --> 00:56:05,799
Speaker 1: and zero. No one knew how to deal with that.

1072
00:56:05,840 --> 00:56:10,759
Speaker 1: And then once we started seeing negative you know bonds,

1073
00:56:10,800 --> 00:56:14,000
Speaker 1: like well, you lend us money and you pay us

1074
00:56:14,040 --> 00:56:17,200
Speaker 1: to hold it, like wait what? And I think that

1075
00:56:17,280 --> 00:56:22,680
Speaker 1: caused all sorts of problems around the world, and people

1076
00:56:22,840 --> 00:56:24,480
Speaker 1: just didn't know how to contextualize.

1077
00:56:24,560 --> 00:56:27,480
Speaker 2: And to your point on behavior, I think something we

1078
00:56:27,480 --> 00:56:30,120
Speaker 2: talked about earlier were the sample size here are small.

1079
00:56:30,160 --> 00:56:32,520
Speaker 2: I think if you took the market to where it

1080
00:56:32,640 --> 00:56:35,359
Speaker 2: was a decade ago and said Fed's bringing rates back down,

1081
00:56:35,440 --> 00:56:38,400
Speaker 2: the world's bringing rates back down, people would look backwards

1082
00:56:38,400 --> 00:56:39,920
Speaker 2: with the playbook and say, we're going to just do

1083
00:56:39,960 --> 00:56:43,080
Speaker 2: all that again, right, and markets would not respond the

1084
00:56:43,120 --> 00:56:45,920
Speaker 2: same way. They would probably do everything in an accelerated fashion,

1085
00:56:46,400 --> 00:56:49,560
Speaker 2: but you wouldn't get the same result because people's behavior

1086
00:56:49,600 --> 00:56:53,359
Speaker 2: would adapt to that previous sample. And so it's it's

1087
00:56:53,520 --> 00:56:55,959
Speaker 2: very complex of how these things work.

1088
00:56:56,120 --> 00:56:59,440
Speaker 1: A little reflexivity in that. Although you could make the

1089
00:56:59,560 --> 00:57:03,680
Speaker 1: argument that in March twenty twenty, down thirty four percent

1090
00:57:03,760 --> 00:57:07,640
Speaker 1: and it felt like six weeks, people look back to

1091
00:57:08,080 --> 00:57:10,840
Speaker 1: nine and said, oh, I got to be a buyer

1092
00:57:11,200 --> 00:57:14,319
Speaker 1: because the last time we saw a big crash, the

1093
00:57:14,360 --> 00:57:17,680
Speaker 1: FED rescued the markets, or the FED did this and

1094
00:57:17,880 --> 00:57:20,840
Speaker 1: ultimately led to that maybe rescue was too over simple.

1095
00:57:22,120 --> 00:57:26,760
Speaker 1: But isn't this why everything eventually gets arbitraged away? Don't

1096
00:57:27,360 --> 00:57:30,800
Speaker 1: the playback from the last cycle the playbook not work

1097
00:57:30,840 --> 00:57:33,280
Speaker 1: in the next cycle because hey, we've kind of figured

1098
00:57:33,280 --> 00:57:33,720
Speaker 1: this out.

1099
00:57:34,200 --> 00:57:36,600
Speaker 2: I'm not sure we've ever figured it out, but again,

1100
00:57:36,640 --> 00:57:39,040
Speaker 2: I think a lot of this does get does get

1101
00:57:39,080 --> 00:57:41,280
Speaker 2: priced in. The whole idea of markets are they're supposed

1102
00:57:41,280 --> 00:57:44,480
Speaker 2: to be efficient information discovery machines, and they have proven

1103
00:57:44,560 --> 00:57:49,240
Speaker 2: to be tremendously powerful and efficient allocators of capital over

1104
00:57:49,280 --> 00:57:51,360
Speaker 2: the long run. It's the best machine we've gotten, so

1105
00:57:51,800 --> 00:57:53,560
Speaker 2: I certainly wouldn't bet against that machine.

1106
00:57:53,920 --> 00:57:57,680
Speaker 1: Let's talk a little bit about your ETFs and return stacking.

1107
00:57:58,400 --> 00:58:03,120
Speaker 1: Starting with the first question is why pivot from pure

1108
00:58:03,160 --> 00:58:07,840
Speaker 1: research to managing assets? And why if you're managing assets,

1109
00:58:08,160 --> 00:58:10,480
Speaker 1: did you go into the ETF side of it.

1110
00:58:11,880 --> 00:58:14,560
Speaker 2: The shift from pure research to managing assets, I think

1111
00:58:14,600 --> 00:58:18,000
Speaker 2: is one that a lot of people ultimately make. When

1112
00:58:18,040 --> 00:58:20,720
Speaker 2: you're just providing research, you really don't have any control

1113
00:58:20,760 --> 00:58:24,600
Speaker 2: over distribution, messaging. Often you don't have control over how

1114
00:58:24,640 --> 00:58:26,840
Speaker 2: your research is being used, and if you're the one

1115
00:58:26,960 --> 00:58:30,080
Speaker 2: doing the research, you often have the best idea of

1116
00:58:30,120 --> 00:58:32,080
Speaker 2: how it should be implemented, or at least you believe

1117
00:58:32,080 --> 00:58:35,880
Speaker 2: you do. It's not quite like selling data or raw data.

1118
00:58:35,960 --> 00:58:38,360
Speaker 2: You're selling a manipulated form of data that you think

1119
00:58:38,400 --> 00:58:41,920
Speaker 2: potentially has some edge or some utility, and you want

1120
00:58:41,920 --> 00:58:44,880
Speaker 2: to make sure that gets expressed correctly. And then frankly,

1121
00:58:44,920 --> 00:58:47,720
Speaker 2: there's probably a little bit of ego in there, going Okay,

1122
00:58:47,760 --> 00:58:49,560
Speaker 2: I want to get closer to the action. I actually

1123
00:58:49,600 --> 00:58:51,600
Speaker 2: want to implement the portfolios that I want to implement.

1124
00:58:51,880 --> 00:58:54,680
Speaker 2: I think I've got some good ideas for bringing some

1125
00:58:55,080 --> 00:58:59,000
Speaker 2: strategies to market. And so over time we went from

1126
00:58:59,240 --> 00:59:03,280
Speaker 2: will provide research search to will be an index provider too,

1127
00:59:03,320 --> 00:59:07,520
Speaker 2: will be a subadvisor, to we'll launch our own funds

1128
00:59:08,240 --> 00:59:11,919
Speaker 2: and I will say to my discredit I originally launched

1129
00:59:11,920 --> 00:59:14,960
Speaker 2: a suite of mutual funds right, which was for someone

1130
00:59:14,960 --> 00:59:17,840
Speaker 2: who grew up in the world of ETFs and was

1131
00:59:17,840 --> 00:59:22,600
Speaker 2: helping run ETF model portfolios. Talk about a dumb business move.

1132
00:59:22,880 --> 00:59:26,400
Speaker 1: What motivated you to go mutual funds over ETFs?

1133
00:59:26,600 --> 00:59:30,800
Speaker 2: So it was twenty thirteen, and what concerned me about

1134
00:59:31,400 --> 00:59:33,840
Speaker 2: standing up ETFs is at the time we didn't have

1135
00:59:35,360 --> 00:59:39,040
Speaker 2: firms like ETF architect or our friend West Gray or

1136
00:59:39,080 --> 00:59:43,880
Speaker 2: Title that were helping with the administration. My concern of

1137
00:59:43,920 --> 00:59:46,040
Speaker 2: setting up my own ETF was that I was going

1138
00:59:46,080 --> 00:59:48,680
Speaker 2: to have to handle all the inter date trading of

1139
00:59:48,800 --> 00:59:51,880
Speaker 2: the creation of redemption baskets. It was going to require

1140
00:59:51,920 --> 00:59:55,080
Speaker 2: me to hire a whole op staff that I candily

1141
00:59:55,080 --> 00:59:57,920
Speaker 2: didn't have the experience or know how to manage. And

1142
00:59:57,960 --> 01:00:00,800
Speaker 2: I said, versus the mutual fund.

1143
01:00:01,000 --> 01:00:02,720
Speaker 1: Which is a little simpler, little clean.

1144
01:00:02,640 --> 01:00:04,720
Speaker 2: Which is a little simpler, little cleaner, and there was

1145
01:00:04,760 --> 01:00:07,040
Speaker 2: a well trodden path of bringing mutual funds to market.

1146
01:00:07,120 --> 01:00:10,120
Speaker 2: So that was twenty thirteen, and again I just didn't

1147
01:00:10,120 --> 01:00:12,520
Speaker 2: feel like being the one who was going bush whacking

1148
01:00:12,520 --> 01:00:14,640
Speaker 2: to figure out how to do this. I should have.

1149
01:00:15,200 --> 01:00:18,320
Speaker 1: How long did it take you to realize, Hey, ETFs

1150
01:00:18,320 --> 01:00:21,280
Speaker 1: are a more efficient especially if there's any sort of turnover.

1151
01:00:21,720 --> 01:00:25,560
Speaker 1: ETFs are a more efficient model, and I can make

1152
01:00:25,640 --> 01:00:27,600
Speaker 1: this work at a similar price.

1153
01:00:27,760 --> 01:00:30,840
Speaker 2: So I absolutely knew from day one ETFs were a

1154
01:00:30,880 --> 01:00:33,720
Speaker 2: more efficient model. I think it probably took me two

1155
01:00:33,840 --> 01:00:36,880
Speaker 2: or three years to say I've chosen the wrong vehicle,

1156
01:00:37,760 --> 01:00:41,800
Speaker 2: not just from a tax efficiency perspective, but from an

1157
01:00:42,120 --> 01:00:47,560
Speaker 2: appetite perspective. Twenty thirteen, people really started to go, I

1158
01:00:47,560 --> 01:00:50,240
Speaker 2: don't even want to talk about mutual funds anymore. If

1159
01:00:50,240 --> 01:00:53,040
Speaker 2: it's not in an ETF, don't talk to me. By

1160
01:00:53,120 --> 01:00:56,360
Speaker 2: twenty seventeen, twenty eighteen, we were having conversations with firms

1161
01:00:56,400 --> 01:00:59,959
Speaker 2: that said, we only invest in ETF's ETF model portfolios only.

1162
01:01:00,280 --> 01:01:01,720
Speaker 2: And by the way, I've got a whole spiel on

1163
01:01:01,760 --> 01:01:05,880
Speaker 2: this that I think that's just as misguided. Strategy and

1164
01:01:05,960 --> 01:01:09,680
Speaker 2: structure need to be aligned, and there are some strategies

1165
01:01:09,680 --> 01:01:12,360
Speaker 2: for which the ETF I think is definitively the wrong structure.

1166
01:01:12,800 --> 01:01:17,040
Speaker 2: It's a whole different conversation. But I ultimately said, I

1167
01:01:17,160 --> 01:01:18,680
Speaker 2: am you look at the flows. You can just look

1168
01:01:18,680 --> 01:01:20,000
Speaker 2: at a map of the flows and say I am

1169
01:01:20,040 --> 01:01:23,200
Speaker 2: selling into a dying industry. I am in the wrong

1170
01:01:23,280 --> 01:01:26,920
Speaker 2: product wrapper. And so I ultimately made the decision to

1171
01:01:27,200 --> 01:01:32,440
Speaker 2: shut down every fund and restart the whole company.

1172
01:01:32,600 --> 01:01:36,040
Speaker 1: So as opposed to just converting them, you went that way,

1173
01:01:36,160 --> 01:01:39,120
Speaker 1: the exit and the relaunch. Yeah, because part by twenty seventeen,

1174
01:01:39,720 --> 01:01:42,120
Speaker 1: WES was doing a number of ETFs, a number of

1175
01:01:42,120 --> 01:01:45,480
Speaker 1: other people and other organizations made it. I don't want

1176
01:01:45,480 --> 01:01:48,600
Speaker 1: to say painless, but less painful to stand up in ETF.

1177
01:01:48,760 --> 01:01:52,240
Speaker 2: Absolutely absolutely, Yeah. I ultimately said, I think there are

1178
01:01:52,320 --> 01:01:55,520
Speaker 2: decisions I made wrong from a structure perspective, and I

1179
01:01:55,520 --> 01:01:58,080
Speaker 2: think there are decisions I made wrong from an actual

1180
01:01:58,600 --> 01:02:01,800
Speaker 2: product perspective. And this is where I think things can

1181
01:02:01,840 --> 01:02:04,800
Speaker 2: sometimes get a little weird in this industry where a

1182
01:02:04,840 --> 01:02:07,640
Speaker 2: guy like me who's a quant wants to always talk

1183
01:02:07,640 --> 01:02:11,040
Speaker 2: about investment strategy. But I was listening to a podcast

1184
01:02:11,120 --> 01:02:13,400
Speaker 2: the other day, an old podcast from Patrick O'Shaughnessy actually,

1185
01:02:13,440 --> 01:02:15,960
Speaker 2: and he said this quote that was basically, an investment

1186
01:02:16,000 --> 01:02:19,120
Speaker 2: product is more than the sum of its returns. And

1187
01:02:19,160 --> 01:02:21,560
Speaker 2: what he meant by that is when people buy an

1188
01:02:21,640 --> 01:02:25,720
Speaker 2: investment product a fund, yes, they're often talking about the

1189
01:02:25,760 --> 01:02:29,560
Speaker 2: investment strategy in the returns, but there's also a utility

1190
01:02:29,160 --> 01:02:32,080
Speaker 2: that often we don't talk about in this industry. So

1191
01:02:32,720 --> 01:02:37,320
Speaker 2: why are high dividend yield products so popular? All the

1192
01:02:37,360 --> 01:02:40,840
Speaker 2: math tells us we should not buy high dividend yield stocks.

1193
01:02:40,880 --> 01:02:45,760
Speaker 2: They are typically an underperforming style of value, and yet

1194
01:02:45,800 --> 01:02:48,960
Speaker 2: there are billions, tens of billions if not hundreds of

1195
01:02:48,960 --> 01:02:53,960
Speaker 2: billions of dollars in high dividend yield ETFs because people

1196
01:02:54,000 --> 01:02:58,880
Speaker 2: are expressing a utility that they just like getting that

1197
01:02:58,920 --> 01:03:02,160
Speaker 2: dividend paid to them ever month. Could they synthetically create

1198
01:03:02,200 --> 01:03:06,120
Speaker 2: that their own dividend, Absolutely, but they're lazy for back

1199
01:03:06,160 --> 01:03:07,480
Speaker 2: of the lack of a letter word, and they like

1200
01:03:07,480 --> 01:03:10,280
Speaker 2: the consistency, and there's utility in that, even though it's

1201
01:03:10,720 --> 01:03:13,840
Speaker 2: from a return perspective suboptimal. And that's hard for people

1202
01:03:13,920 --> 01:03:18,280
Speaker 2: like me sometimes to look at and say, no, I

1203
01:03:18,320 --> 01:03:20,760
Speaker 2: need to teach you to do a better way. Let

1204
01:03:21,200 --> 01:03:23,080
Speaker 2: me educate you as to why you're wrong instead of

1205
01:03:23,080 --> 01:03:25,280
Speaker 2: saying no. That actually has really good product market fit

1206
01:03:25,680 --> 01:03:28,560
Speaker 2: for what the end buyer wants. And so I think

1207
01:03:28,600 --> 01:03:33,720
Speaker 2: I had made some poor product design decisions.

1208
01:03:34,280 --> 01:03:38,360
Speaker 1: So let's talk a little bit about what return stacking is,

1209
01:03:39,000 --> 01:03:43,960
Speaker 1: how it's similar and different to portable alpha. Let's start out.

1210
01:03:43,960 --> 01:03:46,080
Speaker 1: You wrote a really well received white paper on the

1211
01:03:46,200 --> 01:03:51,520
Speaker 1: entire concept of return stacking. Give us this simple explanation

1212
01:03:51,600 --> 01:03:52,600
Speaker 1: of what this is.

1213
01:03:53,040 --> 01:03:55,720
Speaker 2: It's all credit goes to my colleigu Rodrigo Gordillo for

1214
01:03:55,760 --> 01:03:58,640
Speaker 2: coming up with the phrase return stacking, because I think

1215
01:03:58,640 --> 01:04:01,840
Speaker 2: it's it's a more generalized form, but I think it's

1216
01:04:01,880 --> 01:04:05,680
Speaker 2: much more approachable than portable alpha. Right, portable alpha, you

1217
01:04:05,680 --> 01:04:08,160
Speaker 2: need to understand what alpha is. What is porting do?

1218
01:04:08,760 --> 01:04:12,280
Speaker 2: If I say I'm stacking returns, I'm stacking the returns

1219
01:04:12,280 --> 01:04:15,440
Speaker 2: of gold on top of the SMP, you can probably

1220
01:04:15,480 --> 01:04:18,000
Speaker 2: guess that one plus one equus two. It sort of

1221
01:04:18,000 --> 01:04:20,000
Speaker 2: sounds like math, and that's effectively what we're trying to do.

1222
01:04:20,040 --> 01:04:21,919
Speaker 2: It goes back to the problem we were talking about

1223
01:04:21,960 --> 01:04:27,160
Speaker 2: earlier of trying to solve this addition through subtraction issue

1224
01:04:27,480 --> 01:04:33,360
Speaker 2: with diversification. How do I get an industry that disagrees

1225
01:04:33,400 --> 01:04:37,360
Speaker 2: on everything except for diversification is good to add more

1226
01:04:37,360 --> 01:04:41,400
Speaker 2: diversification to their portfolio? Right? You talk to anyone and

1227
01:04:41,440 --> 01:04:44,040
Speaker 2: they'll say, yeah, all else held equal, we want more diversification.

1228
01:04:44,120 --> 01:04:46,840
Speaker 2: Then you go look at their portfolio. It's basically the

1229
01:04:46,880 --> 01:04:48,640
Speaker 2: S and P five hundred in bonds and there's nothing

1230
01:04:49,840 --> 01:04:52,080
Speaker 2: necessarily wrong with that. But the question is can we

1231
01:04:52,160 --> 01:04:57,280
Speaker 2: go further to introduce diversifiers that can improve both the

1232
01:04:57,720 --> 01:05:00,360
Speaker 2: consistency with which we can achieve our outcomes and the

1233
01:05:00,440 --> 01:05:03,720
Speaker 2: return potential. And so return stacking at its core is

1234
01:05:03,760 --> 01:05:07,480
Speaker 2: trying to take the institutional concept of portable alpha and

1235
01:05:07,520 --> 01:05:11,200
Speaker 2: bring it downstream. Because institutions to implement that concept have

1236
01:05:11,320 --> 01:05:15,040
Speaker 2: to buy futures and swaps and manage all these separate accounts.

1237
01:05:15,720 --> 01:05:19,400
Speaker 2: What we've tried to do is prepackage that concept into

1238
01:05:19,480 --> 01:05:20,520
Speaker 2: a suite of ETFs.

1239
01:05:21,520 --> 01:05:25,160
Speaker 1: So, so you the white paper comes out, Wisdom Tree

1240
01:05:25,240 --> 01:05:27,520
Speaker 1: launches a product related to this. Did you have anything

1241
01:05:27,560 --> 01:05:28,040
Speaker 1: to do with that?

1242
01:05:28,320 --> 01:05:31,520
Speaker 2: So back in twenty seventeen, you and I, I don't

1243
01:05:31,520 --> 01:05:32,760
Speaker 2: know if you remember this, You and I were going

1244
01:05:32,840 --> 01:05:37,000
Speaker 2: to Baron's round table, uh huh called what's next for ETFs?

1245
01:05:37,440 --> 01:05:41,080
Speaker 2: And at that roundtable, I said, uh oh, I said,

1246
01:05:41,520 --> 01:05:45,400
Speaker 2: I think what's next for etf are capital efficient ETFs.

1247
01:05:45,960 --> 01:05:49,240
Speaker 2: And the example I gave was buy the you know,

1248
01:05:49,280 --> 01:05:52,760
Speaker 2: instead of having a stock and bond fund, this fund

1249
01:05:52,840 --> 01:05:56,560
Speaker 2: could buy the S and P and overlay with treasury futures.

1250
01:05:56,600 --> 01:05:59,040
Speaker 2: And so if you give it a dollar, it's going

1251
01:05:59,120 --> 01:06:01,200
Speaker 2: to give you, say, nine dents of the SMP and

1252
01:06:01,240 --> 01:06:04,640
Speaker 2: sixty cents of treasury futures, giving you a ninety sixty

1253
01:06:04,720 --> 01:06:06,760
Speaker 2: at one point five times lever at sixty forty. And

1254
01:06:06,800 --> 01:06:09,040
Speaker 2: the idea there is, okay, you can put two thirds

1255
01:06:09,040 --> 01:06:12,440
Speaker 2: of your money in that fund, get a sixty forty exposure,

1256
01:06:12,600 --> 01:06:13,960
Speaker 2: and then you can take that one third of your

1257
01:06:14,000 --> 01:06:16,160
Speaker 2: cash and do whatever. You can leave it in cash

1258
01:06:16,160 --> 01:06:17,880
Speaker 2: if you just like sitting on cash, or you can

1259
01:06:17,880 --> 01:06:23,760
Speaker 2: invest it in alternatives implementing portable alpha. Jeremy Schwartz, who's

1260
01:06:23,800 --> 01:06:26,360
Speaker 2: a good friend of both of ours, showed that article

1261
01:06:26,400 --> 01:06:28,280
Speaker 2: around internally. It was. We had a whole bunch of

1262
01:06:28,320 --> 01:06:31,880
Speaker 2: Twitter conversations about it. Next thing you know, he says, Hey, Corey,

1263
01:06:32,040 --> 01:06:34,640
Speaker 2: I'm launching a product on this, and the Wisdom Tree

1264
01:06:34,720 --> 01:06:35,840
Speaker 2: and TSX fund was born.

1265
01:06:35,920 --> 01:06:40,600
Speaker 1: I recall I recall Jeremy subsequently launching that. I hope

1266
01:06:40,600 --> 01:06:44,480
Speaker 1: they at least tossed you a bone and consulting something.

1267
01:06:45,080 --> 01:06:47,040
Speaker 2: Jeremy had me on a couple of podcasts to talk

1268
01:06:47,080 --> 01:06:47,440
Speaker 2: about it.

1269
01:06:47,480 --> 01:06:50,040
Speaker 1: There you go. I hope I didn't say anything too

1270
01:06:50,080 --> 01:06:52,320
Speaker 1: stupid at that roundtable. I can remember that up on

1271
01:06:52,560 --> 01:06:55,560
Speaker 1: sixty Avenue. Yeah, right, get by their offices.

1272
01:06:55,920 --> 01:06:58,720
Speaker 2: That's right, it was. And I actually have been using

1273
01:06:58,720 --> 01:07:01,640
Speaker 2: my headshot from that pracle since then, which.

1274
01:07:01,800 --> 01:07:03,480
Speaker 1: I got a couple of great photos from that.

1275
01:07:03,760 --> 01:07:06,520
Speaker 2: So I didn't realize this is like a Pulitzer Prize

1276
01:07:06,560 --> 01:07:09,600
Speaker 2: winning photographer who Yeah, took our photos. They're the best

1277
01:07:09,640 --> 01:07:12,280
Speaker 2: headshots I've ever had, same saying, and finally I said,

1278
01:07:12,320 --> 01:07:16,280
Speaker 2: it's seven years later, I'm officially catfishing people with this photo.

1279
01:07:16,320 --> 01:07:18,320
Speaker 2: I don't look anything like this anymore.

1280
01:07:18,440 --> 01:07:21,640
Speaker 1: Every now and then I will see something show up

1281
01:07:21,760 --> 01:07:25,000
Speaker 1: on a bio at some event for me and I'm like, dude,

1282
01:07:25,040 --> 01:07:30,160
Speaker 1: that's twenty years old. I'm not only grayer and twenty

1283
01:07:30,160 --> 01:07:33,360
Speaker 1: pounds lighter than then, but like, I look nothing like

1284
01:07:33,400 --> 01:07:36,720
Speaker 1: that anymore. It's like, wow, we found that online. So yeah,

1285
01:07:36,760 --> 01:07:38,400
Speaker 1: I know exactly what you're telling.

1286
01:07:38,440 --> 01:07:40,080
Speaker 2: So I had to get rid of that one. So yeah,

1287
01:07:40,120 --> 01:07:42,280
Speaker 2: So that was the birth of the NTSX fund, and

1288
01:07:43,320 --> 01:07:45,960
Speaker 2: I was super happy to see Wisdom treat do that

1289
01:07:45,960 --> 01:07:49,200
Speaker 2: because I really do believe that this is a whole

1290
01:07:49,280 --> 01:07:52,520
Speaker 2: category of products that has not existed really before. There's

1291
01:07:52,560 --> 01:07:56,520
Speaker 2: a couple of select examples, but really should be a

1292
01:07:56,640 --> 01:08:00,680
Speaker 2: whole part of the industry. Because again, Institute have used

1293
01:08:00,720 --> 01:08:04,680
Speaker 2: this concept for forty years and use it very effectively

1294
01:08:05,280 --> 01:08:07,680
Speaker 2: to be able to say to an investor, hey, I

1295
01:08:07,760 --> 01:08:10,320
Speaker 2: think a strategy like managed futures trend following adds a

1296
01:08:10,320 --> 01:08:13,160
Speaker 2: lot of value to your portfolio, and no longer do

1297
01:08:13,200 --> 01:08:15,240
Speaker 2: I have to sell some stocks and bonds to make room.

1298
01:08:15,600 --> 01:08:17,120
Speaker 2: I can let you keep your stocks and bonds, and

1299
01:08:17,160 --> 01:08:19,400
Speaker 2: I'm going to add a ten percent allocation on top.

1300
01:08:20,760 --> 01:08:22,960
Speaker 2: When managed futures go through a lost decade like they

1301
01:08:22,960 --> 01:08:25,679
Speaker 2: did in the twenty tens, the investor will barely notice

1302
01:08:25,680 --> 01:08:28,840
Speaker 2: it and they'll be able to stay in it for

1303
01:08:29,000 --> 01:08:30,400
Speaker 2: when man features does well in a year like.

1304
01:08:30,400 --> 01:08:33,679
Speaker 1: Twenty So that's the behavioral component of this. How does

1305
01:08:33,720 --> 01:08:37,640
Speaker 1: this differ just from straight up leverage? It sounds like

1306
01:08:37,680 --> 01:08:40,240
Speaker 1: we're turn stacking has a big leverage component.

1307
01:08:40,320 --> 01:08:44,240
Speaker 2: It is. It is absolutely leverage. I think the idea

1308
01:08:44,240 --> 01:08:46,559
Speaker 2: here is, again leverage is a tool that accentuates the

1309
01:08:46,600 --> 01:08:49,120
Speaker 2: good and the bad. We want to be very thoughtful

1310
01:08:49,640 --> 01:08:52,280
Speaker 2: about what we're stacking on top. So if you're a

1311
01:08:52,320 --> 01:08:56,080
Speaker 2: sixty forty investor, I certainly would not say use this

1312
01:08:56,160 --> 01:08:58,720
Speaker 2: concept to stack more equities, You're probably just going to

1313
01:08:58,800 --> 01:09:01,480
Speaker 2: get in trouble. But if you can use this concept

1314
01:09:01,479 --> 01:09:06,639
Speaker 2: to stack diversifiers like commodities and gold, historically that hasn't

1315
01:09:06,680 --> 01:09:08,120
Speaker 2: been an issue. And in fact, I would point to

1316
01:09:08,160 --> 01:09:10,200
Speaker 2: the Bridgewater All Weather Fund right.

1317
01:09:10,040 --> 01:09:12,320
Speaker 1: Who takes the twenty five percent gold.

1318
01:09:12,040 --> 01:09:14,640
Speaker 2: And takes this concept to the extreme and runs with

1319
01:09:15,360 --> 01:09:18,160
Speaker 2: significant amount of notional leverage with the idea they're trying

1320
01:09:18,160 --> 01:09:22,439
Speaker 2: to risk balance all the variety of asset classes. And

1321
01:09:22,479 --> 01:09:25,719
Speaker 2: it held up incredibly well during two thousand and eight

1322
01:09:25,840 --> 01:09:28,720
Speaker 2: despite having so much leverage. And it's because they're using

1323
01:09:28,800 --> 01:09:32,400
Speaker 2: leverage to unlock the benefits of diversification rather than using

1324
01:09:32,479 --> 01:09:34,320
Speaker 2: leverage to amplify returns.

1325
01:09:34,400 --> 01:09:36,479
Speaker 1: Gotcha, that makes a lot of sense. So you currently

1326
01:09:36,880 --> 01:09:41,280
Speaker 1: are running five different return stacked ETFs. Do they each

1327
01:09:41,320 --> 01:09:45,080
Speaker 1: have a different goal? How do different combinations work? And

1328
01:09:45,120 --> 01:09:47,640
Speaker 1: what are we seven hundred eight hundred million dollars.

1329
01:09:47,320 --> 01:09:50,800
Speaker 2: Just clipped over eight hundred million dollars launched I guess

1330
01:09:50,840 --> 01:09:54,280
Speaker 2: eighteen twenty months ago. So we're very happy and pleased

1331
01:09:54,280 --> 01:09:56,880
Speaker 2: with the growth, and I think it speaks to people

1332
01:09:56,960 --> 01:09:59,120
Speaker 2: understanding what we're trying to do in this new form

1333
01:09:59,160 --> 01:10:02,559
Speaker 2: of diversification, trying to build talking about getting a little

1334
01:10:02,560 --> 01:10:03,920
Speaker 2: bit smarter on the product side.

1335
01:10:04,000 --> 01:10:04,400
Speaker 1: Mm hmm.

1336
01:10:05,640 --> 01:10:07,479
Speaker 2: One of the things I think I underappreciated earlier in

1337
01:10:07,560 --> 01:10:10,680
Speaker 2: my career is that advisors and allocators want control in

1338
01:10:10,720 --> 01:10:13,800
Speaker 2: their portfolio. And so with this new suite, what we've

1339
01:10:13,840 --> 01:10:15,400
Speaker 2: tried to come out with is what I would call

1340
01:10:15,560 --> 01:10:18,400
Speaker 2: very much a lego or building block approach, where each

1341
01:10:18,520 --> 01:10:23,000
Speaker 2: product is very narrowly focused so that allocators can use

1342
01:10:23,040 --> 01:10:24,920
Speaker 2: them how they want. So I'll just give two really

1343
01:10:25,000 --> 01:10:29,479
Speaker 2: quick examples. We have one fund that for every dollar

1344
01:10:29,520 --> 01:10:32,000
Speaker 2: you invest with US, we'll give you what is effectively

1345
01:10:32,040 --> 01:10:35,760
Speaker 2: a dollar of passive large cap US equities plus a

1346
01:10:35,840 --> 01:10:39,439
Speaker 2: dollar of a managed future's trend following strategy. We have

1347
01:10:39,520 --> 01:10:41,880
Speaker 2: another fund that for every dollar you invest with US,

1348
01:10:42,000 --> 01:10:44,599
Speaker 2: will give you a dollar of core US fixed income

1349
01:10:45,439 --> 01:10:48,880
Speaker 2: plus a dollar of MANAED futures trend following same MANA

1350
01:10:49,000 --> 01:10:51,880
Speaker 2: futures trend following on top, but one gives you the

1351
01:10:51,920 --> 01:10:55,519
Speaker 2: S and P one gives you bonds as the bottom layer.

1352
01:10:55,720 --> 01:10:58,600
Speaker 1: So that would allow someone to say, I want to

1353
01:10:58,600 --> 01:11:02,000
Speaker 1: own both managed future and either I'm bullish and i

1354
01:11:02,040 --> 01:11:05,120
Speaker 1: want equity, or I'm conservative and I'm embarish and i

1355
01:11:05,120 --> 01:11:05,719
Speaker 1: want bonds.

1356
01:11:05,840 --> 01:11:08,000
Speaker 2: I would go the other way, which is you're a

1357
01:11:08,120 --> 01:11:12,280
Speaker 2: very aggressive investor, you're let's say a growth client eighty twenty.

1358
01:11:12,600 --> 01:11:16,120
Speaker 2: You just have more equities around it's easier to potentially

1359
01:11:16,160 --> 01:11:19,679
Speaker 2: overlay your equities than it is on bonds. Or you're

1360
01:11:19,840 --> 01:11:22,559
Speaker 2: a very conservative investor, you just have more bonds around,

1361
01:11:23,280 --> 01:11:25,679
Speaker 2: or you have a strong view that you can add

1362
01:11:25,760 --> 01:11:29,200
Speaker 2: alpha in your bond managers. But you're never going to

1363
01:11:29,240 --> 01:11:31,120
Speaker 2: beat the S and P five hundred. So take that

1364
01:11:31,160 --> 01:11:33,400
Speaker 2: passive S and P five hundred and buy our fund.

1365
01:11:33,640 --> 01:11:36,200
Speaker 2: You get the SMP back with the MANA features on top,

1366
01:11:36,400 --> 01:11:38,599
Speaker 2: because you don't want to do it with bonds because

1367
01:11:38,640 --> 01:11:40,639
Speaker 2: you think your bond manager is going to add value.

1368
01:11:40,880 --> 01:11:44,400
Speaker 2: So again I'm being non prescriptive in the products I'm

1369
01:11:44,400 --> 01:11:46,920
Speaker 2: bringing to market. I'm letting people say I like the

1370
01:11:46,960 --> 01:11:50,240
Speaker 2: concept of adding an overlay. How I want to express

1371
01:11:50,280 --> 01:11:52,479
Speaker 2: and where I want to express, and the size with

1372
01:11:52,520 --> 01:11:55,240
Speaker 2: which I want to express. That's a conversation and a

1373
01:11:55,280 --> 01:11:57,719
Speaker 2: dialogue we have when we consult with our clients.

1374
01:11:57,800 --> 01:12:00,400
Speaker 1: So a couple of questions on that. First, who are

1375
01:12:00,439 --> 01:12:05,400
Speaker 1: the typical clients are these institutions? Are they arias who

1376
01:12:05,600 --> 01:12:09,840
Speaker 1: wants the sort of return stacking in their either their

1377
01:12:09,840 --> 01:12:12,760
Speaker 1: core portfolio or any of their satellite.

1378
01:12:12,320 --> 01:12:15,040
Speaker 2: Hold Yeah, it's really funny, so you would think potentially

1379
01:12:15,040 --> 01:12:17,760
Speaker 2: with institutions, And we have lots of calls with institutions

1380
01:12:17,800 --> 01:12:19,800
Speaker 2: and they all say the same thing, which is, we

1381
01:12:19,880 --> 01:12:22,719
Speaker 2: love this and we also do it ourselves. We don't

1382
01:12:22,840 --> 01:12:26,320
Speaker 2: need to buy an ETF. Really, they're doing it the

1383
01:12:26,320 --> 01:12:28,280
Speaker 2: way they've historically done it, which is they have banking

1384
01:12:28,320 --> 01:12:30,840
Speaker 2: relationships and they manage the futures and the swaps, and

1385
01:12:31,160 --> 01:12:34,479
Speaker 2: so they don't need a product like an ETF. So

1386
01:12:35,479 --> 01:12:37,559
Speaker 2: where we tend to see and have seen all the

1387
01:12:37,560 --> 01:12:42,800
Speaker 2: flows is independent arias who are saying, I'm trying to

1388
01:12:42,800 --> 01:12:47,719
Speaker 2: figure out how to get diversification. I like alternatives, but man,

1389
01:12:47,960 --> 01:12:50,080
Speaker 2: it is hard to say to my client for the

1390
01:12:50,120 --> 01:12:52,599
Speaker 2: fifth time when they point to that managed futures fund

1391
01:12:52,640 --> 01:12:54,800
Speaker 2: as a line item and they say, why in the

1392
01:12:54,840 --> 01:12:58,240
Speaker 2: world do we have this right? And you're saying, well,

1393
01:12:58,400 --> 01:13:00,680
Speaker 2: because diversification.

1394
01:13:00,080 --> 01:13:01,640
Speaker 1: In the next cycle, right.

1395
01:13:01,840 --> 01:13:05,320
Speaker 2: Brian Portnoy says, diversification means always having to say you're sorry.

1396
01:13:06,240 --> 01:13:08,800
Speaker 2: And if you are an advisor running a business and

1397
01:13:08,800 --> 01:13:11,160
Speaker 2: you're saying sorry to your clients too much, that's a

1398
01:13:11,160 --> 01:13:13,840
Speaker 2: great way to get fired. There's just real business risk there.

1399
01:13:14,120 --> 01:13:16,439
Speaker 2: And so what we're finding is not only I think,

1400
01:13:16,439 --> 01:13:19,360
Speaker 2: do we make a compelling value proposition of Hey, this

1401
01:13:19,439 --> 01:13:22,160
Speaker 2: is an interesting way of trying to add returns to

1402
01:13:22,200 --> 01:13:24,719
Speaker 2: your portfolio. The portable alpha sense. Do you think managed

1403
01:13:24,760 --> 01:13:27,799
Speaker 2: futures generates two hundred three hundred basis points of excess

1404
01:13:27,840 --> 01:13:30,760
Speaker 2: returns over time. Why are you picking stocks? Just buy

1405
01:13:30,760 --> 01:13:32,479
Speaker 2: the S and P five hundred and add man futures

1406
01:13:32,520 --> 01:13:35,800
Speaker 2: on top. But for the diversifiers, they're going, this is

1407
01:13:35,840 --> 01:13:39,680
Speaker 2: a great way to introduce my alternatives without giving up

1408
01:13:39,720 --> 01:13:43,000
Speaker 2: all the beta and having that return hurdle issue and

1409
01:13:43,040 --> 01:13:44,639
Speaker 2: having that behavioral friction issue.

1410
01:13:44,800 --> 01:13:49,920
Speaker 1: So you have US equity with managed futures, you have

1411
01:13:50,520 --> 01:13:53,280
Speaker 1: US bonds with managed futures. What are the other ETFs?

1412
01:13:53,320 --> 01:13:55,760
Speaker 2: We have a US equity plus what we would call

1413
01:13:55,760 --> 01:13:58,799
Speaker 2: it a multi asset carry strategy. This is so managed

1414
01:13:58,800 --> 01:14:01,880
Speaker 2: futures is typically done with trend following signals. It can

1415
01:14:01,920 --> 01:14:04,280
Speaker 2: also be done with what's called the carry signal, which

1416
01:14:04,320 --> 01:14:06,080
Speaker 2: is you can sort of think of carry as your yield.

1417
01:14:06,360 --> 01:14:07,880
Speaker 2: What's the return you're going to get if the world

1418
01:14:07,960 --> 01:14:12,320
Speaker 2: doesn't change, and so carry signals can be powerful predictors

1419
01:14:12,320 --> 01:14:15,160
Speaker 2: of total returns. So it's just a different quant signal.

1420
01:14:15,320 --> 01:14:19,600
Speaker 2: It behaves differently, trades a similar universe of currencies and

1421
01:14:19,640 --> 01:14:23,040
Speaker 2: commodities and equities and rates around the world. So it's

1422
01:14:23,240 --> 01:14:26,320
Speaker 2: long short just a different quant signal. So we have

1423
01:14:26,360 --> 01:14:29,240
Speaker 2: a US plus that we have a bonds plus that

1424
01:14:29,320 --> 01:14:32,559
Speaker 2: multi asse carry. And then the final piece is what

1425
01:14:32,600 --> 01:14:35,040
Speaker 2: I consider to be our most flexible portfolio, which is

1426
01:14:35,200 --> 01:14:36,840
Speaker 2: just you give us a dollar, We'll give you a

1427
01:14:36,840 --> 01:14:40,080
Speaker 2: dollar of as passively allocated as we can global stocks,

1428
01:14:40,640 --> 01:14:43,439
Speaker 2: plus a ladder of US treasuries. And the idea there

1429
01:14:43,560 --> 01:14:47,360
Speaker 2: is not to say, let's stack bonds on top of

1430
01:14:47,360 --> 01:14:51,120
Speaker 2: equities in your portfolio. The idea there is to say

1431
01:14:51,240 --> 01:14:55,320
Speaker 2: that is an incredibly powerful capital efficiency tool that allows

1432
01:14:55,400 --> 01:14:58,479
Speaker 2: you to stack whatever you want. So let me give

1433
01:14:58,479 --> 01:15:00,960
Speaker 2: you a really quick example. Let's say you've got a

1434
01:15:01,000 --> 01:15:04,439
Speaker 2: sixty forty portfolio sixty percent stocks, forty percent ponds. If

1435
01:15:04,479 --> 01:15:07,639
Speaker 2: you sell ten percent of your stocks and ten percent

1436
01:15:07,640 --> 01:15:10,479
Speaker 2: of your bonds and by ten percent of that fund,

1437
01:15:11,080 --> 01:15:13,120
Speaker 2: that ten percent of that fund gives you both the

1438
01:15:13,120 --> 01:15:15,719
Speaker 2: stocks and bonds back, and now you have ten percent

1439
01:15:15,960 --> 01:15:19,320
Speaker 2: leftover in cash with which you can do whatever you want.

1440
01:15:19,520 --> 01:15:22,280
Speaker 2: You could have it sit in cash and then sit

1441
01:15:22,320 --> 01:15:24,519
Speaker 2: in tea bills, and the return of that portfolio would

1442
01:15:24,520 --> 01:15:26,439
Speaker 2: be sort of the same as your sixty forty. But hey,

1443
01:15:26,520 --> 01:15:28,760
Speaker 2: now you've got more cash on hand, you can do

1444
01:15:28,800 --> 01:15:32,400
Speaker 2: some interesting things about self financing. Actually, because you're technically

1445
01:15:32,400 --> 01:15:34,599
Speaker 2: borrowing from yourself. You can use that cash and you've

1446
01:15:34,600 --> 01:15:37,640
Speaker 2: actually just taken a loan based on and it's very

1447
01:15:37,720 --> 01:15:40,400
Speaker 2: attractive financing rates. The embedded rate of financing in these

1448
01:15:40,479 --> 01:15:42,800
Speaker 2: futures is like T bills, So instead of borrowing from

1449
01:15:42,800 --> 01:15:45,360
Speaker 2: a bank, you can actually borrow from yourself, or you

1450
01:15:45,360 --> 01:15:48,720
Speaker 2: can take that cash and invest in something, hopefully for

1451
01:15:49,160 --> 01:15:52,200
Speaker 2: diversification or return. But as long as whatever you're investing

1452
01:15:52,200 --> 01:15:56,480
Speaker 2: in outperforms cash, you will have added value to your portfolio.

1453
01:15:56,640 --> 01:16:00,200
Speaker 2: So let's say you love managed futures as a strategy,

1454
01:16:00,280 --> 01:16:02,559
Speaker 2: but you don't like the way I implement Manch futures.

1455
01:16:03,240 --> 01:16:06,960
Speaker 2: You love Cliff Assness at AQR, you love their fund, Well,

1456
01:16:07,000 --> 01:16:10,680
Speaker 2: you can buy my Global Stocks and Bonds fund to

1457
01:16:10,960 --> 01:16:13,880
Speaker 2: free up the cash to then invest in his Manch

1458
01:16:13,920 --> 01:16:17,479
Speaker 2: Futures fund. And what you've effectively done is kept your

1459
01:16:17,479 --> 01:16:21,080
Speaker 2: sixty forty hole and stacked his fund on top. And

1460
01:16:21,120 --> 01:16:24,800
Speaker 2: so you can now stack whatever alternative asset class or

1461
01:16:24,840 --> 01:16:28,080
Speaker 2: investment strategy you want with our tool.

1462
01:16:28,560 --> 01:16:32,200
Speaker 1: Huh really really fascinating. The name of the company is

1463
01:16:32,680 --> 01:16:37,000
Speaker 1: the Return Stacked ETF Suite. There are five different ETFs

1464
01:16:37,040 --> 01:16:40,000
Speaker 1: on it. I have a couple of questions I've been

1465
01:16:40,200 --> 01:16:44,679
Speaker 1: saving before we get to our favorite questions, and let's

1466
01:16:44,760 --> 01:16:47,920
Speaker 1: start with something that I think is really kind of interesting.

1467
01:16:48,880 --> 01:16:52,960
Speaker 1: During the pandemic, you did a video with Jason Buck

1468
01:16:53,120 --> 01:16:57,160
Speaker 1: where you were discussing deep in the weeds research into

1469
01:16:57,360 --> 01:17:02,559
Speaker 1: NFTs and crypto and degenerate like I in fact, it

1470
01:17:02,640 --> 01:17:04,560
Speaker 1: might have come from nadding said, oh, you got to

1471
01:17:04,560 --> 01:17:07,400
Speaker 1: watch this. This is hilarious in a good way, not

1472
01:17:07,479 --> 01:17:11,200
Speaker 1: a sarcastic way. What was going on with crypto and

1473
01:17:11,320 --> 01:17:14,960
Speaker 1: NFT trading during the COVID lockdowns.

1474
01:17:15,240 --> 01:17:16,760
Speaker 2: So Jason Buck is a good friend of mine. He

1475
01:17:16,840 --> 01:17:20,120
Speaker 2: runs Mutiny Funds, and we started this podcast as he

1476
01:17:20,160 --> 01:17:22,280
Speaker 2: has u UN funds Mutiny Funds.

1477
01:17:22,960 --> 01:17:26,800
Speaker 1: What wasn't there another pod? Maybe it was he who

1478
01:17:26,880 --> 01:17:29,760
Speaker 1: was hosting it was Pirate Capital.

1479
01:17:29,400 --> 01:17:31,880
Speaker 2: Or Pirates of Finance, Pirates of Finance, So that was

1480
01:17:32,000 --> 01:17:34,720
Speaker 2: Jason and I started that during the pandemic work we

1481
01:17:34,720 --> 01:17:36,200
Speaker 2: weren't allowed out of our houses anymore.

1482
01:17:36,200 --> 01:17:38,879
Speaker 1: I love that. I love that title of that podcast.

1483
01:17:39,000 --> 01:17:40,559
Speaker 2: So that was a fun one for us where we

1484
01:17:40,600 --> 01:17:42,960
Speaker 2: just said, you know, that was the era of all right,

1485
01:17:43,000 --> 01:17:45,720
Speaker 2: on a Friday afternoon, let's grab a beer, chop it

1486
01:17:45,800 --> 01:17:48,639
Speaker 2: up see what's going on in markets. And for folks

1487
01:17:48,680 --> 01:17:51,559
Speaker 2: who weren't paying attention to the crypto markets at that time,

1488
01:17:51,600 --> 01:17:56,479
Speaker 2: it was an absolutely Cambrian explosion of activity. You had

1489
01:17:56,640 --> 01:18:00,080
Speaker 2: all these retail traders who started trading crypto, and and

1490
01:18:00,120 --> 01:18:03,160
Speaker 2: the available functionality of what you could build in crypto

1491
01:18:03,240 --> 01:18:06,000
Speaker 2: really exploded. So you not only had NFTs, but you

1492
01:18:06,120 --> 01:18:09,960
Speaker 2: had all these we're called protocols or applications that were

1493
01:18:10,240 --> 01:18:12,640
Speaker 2: doing all this interesting stuff. And it was a fascinating

1494
01:18:12,680 --> 01:18:15,240
Speaker 2: world to explore, not only from the what does this

1495
01:18:15,640 --> 01:18:19,160
Speaker 2: mean for the future, but there were some incredible trading

1496
01:18:19,200 --> 01:18:22,879
Speaker 2: opportunities m hm for people who operated in traditional markets

1497
01:18:22,920 --> 01:18:27,360
Speaker 2: that you would see things and say that shouldn't be

1498
01:18:27,520 --> 01:18:31,840
Speaker 2: like that, that's wildly mispriced, and in any traditional market

1499
01:18:31,880 --> 01:18:35,559
Speaker 2: that wouldn't exist. But okay, I'll put my money where

1500
01:18:35,600 --> 01:18:38,320
Speaker 2: my mouth is. And so there was a fun trading opportunity.

1501
01:18:38,360 --> 01:18:40,519
Speaker 2: I certainly wouldn't say I maximized it.

1502
01:18:40,720 --> 01:18:44,160
Speaker 1: Yeah, but you're a computer science market structure guy, this

1503
01:18:44,240 --> 01:18:45,360
Speaker 1: is your sweet spot.

1504
01:18:45,280 --> 01:18:49,080
Speaker 2: And it's just fun. Because it was almost by definition

1505
01:18:49,240 --> 01:18:53,479
Speaker 2: because of regulatory reasons, lots of parties couldn't get involved.

1506
01:18:53,880 --> 01:18:57,160
Speaker 2: You had a market that was being dominated by retail.

1507
01:18:58,280 --> 01:19:01,280
Speaker 2: I don't want to say I'll lower in flow, right,

1508
01:19:01,400 --> 01:19:02,920
Speaker 2: more momentum driven.

1509
01:19:02,760 --> 01:19:04,480
Speaker 1: Low information voters.

1510
01:19:04,520 --> 01:19:07,160
Speaker 2: Just the systems weren't set up. There were limits to arbitrage,

1511
01:19:07,200 --> 01:19:10,120
Speaker 2: and so you had these situations where you said, oh,

1512
01:19:10,160 --> 01:19:12,040
Speaker 2: you can make a good deal of money here. And

1513
01:19:12,080 --> 01:19:15,400
Speaker 2: I had friends who dropped their careers in finance and said,

1514
01:19:16,160 --> 01:19:18,360
Speaker 2: I used to be a market maker for treasury futures

1515
01:19:18,400 --> 01:19:21,200
Speaker 2: and I'm now a market maker for crypto and oh

1516
01:19:21,280 --> 01:19:23,760
Speaker 2: now I'm retired two years later because the market's that

1517
01:19:23,920 --> 01:19:26,320
Speaker 2: inefficient and all I had to do was port the

1518
01:19:26,360 --> 01:19:29,000
Speaker 2: exact same skill set that was a blood bath in

1519
01:19:29,080 --> 01:19:33,439
Speaker 2: traditional markets eking for every bip and it's just you're

1520
01:19:33,479 --> 01:19:35,599
Speaker 2: just printing money. And it was a very limited window

1521
01:19:35,600 --> 01:19:38,599
Speaker 2: that does not exist anymore. But there was this really

1522
01:19:38,880 --> 01:19:43,439
Speaker 2: fascinating window of both investor behavior and opportunity in what

1523
01:19:43,560 --> 01:19:45,479
Speaker 2: was developing and what it all could become.

1524
01:19:46,400 --> 01:19:50,959
Speaker 1: So so I'm assuming you made a couple of shekels trading. Uh,

1525
01:19:51,000 --> 01:19:51,320
Speaker 1: we had.

1526
01:19:51,360 --> 01:19:53,519
Speaker 2: There were some fun trades, right, there were some fun times.

1527
01:19:54,360 --> 01:19:58,439
Speaker 1: How quickly did you realize that window was closing? And

1528
01:19:58,479 --> 01:20:02,519
Speaker 1: I'm assuming that was pre f X and SBFU and

1529
01:20:02,600 --> 01:20:04,800
Speaker 1: Sam Bankman freed and that that mayhem.

1530
01:20:05,080 --> 01:20:10,799
Speaker 2: It was probably during the Luna collapse. Again, I apologize

1531
01:20:10,840 --> 01:20:12,040
Speaker 2: for folks who didn't track.

1532
01:20:12,040 --> 01:20:14,920
Speaker 1: Luna is a stable coin that was supposed to just

1533
01:20:15,000 --> 01:20:19,000
Speaker 1: trade at a dollar. What's his name very famously got

1534
01:20:19,000 --> 01:20:26,400
Speaker 1: a tattoo, yes of it novograts and then suddenly the

1535
01:20:26,520 --> 01:20:29,559
Speaker 1: rug was pulled out and it turned out to not

1536
01:20:29,640 --> 01:20:30,439
Speaker 1: be all it was.

1537
01:20:30,760 --> 01:20:34,120
Speaker 2: Yeah, you right, these stable coins which are away for

1538
01:20:34,200 --> 01:20:38,160
Speaker 2: people to transact in what are effectively dollars on the blockchain,

1539
01:20:38,560 --> 01:20:41,160
Speaker 2: some of which are actually backed by dollars and others

1540
01:20:41,200 --> 01:20:44,240
Speaker 2: of which are fractionally backed or backed by a variety

1541
01:20:44,240 --> 01:20:47,439
Speaker 2: of assets. And then you had what was called algorithmically

1542
01:20:47,840 --> 01:20:51,240
Speaker 2: backed stable coins, and I don't think there's any success

1543
01:20:51,280 --> 01:20:56,000
Speaker 2: stories there. They all blew up, right Mark Mark Cuban

1544
01:20:56,040 --> 01:20:58,320
Speaker 2: famously lost a bunch of money in one of those

1545
01:20:59,320 --> 01:21:02,320
Speaker 2: what was called it was called Iron Finances, was what

1546
01:21:02,360 --> 01:21:05,000
Speaker 2: the it was called. And that you know, again, when

1547
01:21:05,000 --> 01:21:08,320
Speaker 2: you have nothing backing a coin other than a systematic

1548
01:21:08,320 --> 01:21:09,880
Speaker 2: strategy that's going to try to buy and sell the

1549
01:21:09,920 --> 01:21:11,960
Speaker 2: coin to keep it within a peg, it just.

1550
01:21:12,200 --> 01:21:15,280
Speaker 1: Doesn't that sound like portfolio insurance From the eighty seven

1551
01:21:15,320 --> 01:21:19,479
Speaker 1: crash is nothing new old again? Is it just it's

1552
01:21:19,640 --> 01:21:22,400
Speaker 1: just amazing that, Oh yeah, we'll find a way to

1553
01:21:22,520 --> 01:21:25,040
Speaker 1: just hedge it as the market starts rolling off.

1554
01:21:25,200 --> 01:21:28,400
Speaker 2: So you had all this abundance of hot capital in

1555
01:21:28,479 --> 01:21:32,040
Speaker 2: this market that suddenly evaporated. You had very loud players

1556
01:21:32,080 --> 01:21:36,160
Speaker 2: like three arrows capital that was massively over levered start

1557
01:21:36,240 --> 01:21:40,160
Speaker 2: to fall apart. And as that liquidity disappears, so with

1558
01:21:40,280 --> 01:21:43,360
Speaker 2: it do the abundant trading opportunities. And so that's where

1559
01:21:43,400 --> 01:21:46,280
Speaker 2: it started to become clear to me. It just the

1560
01:21:46,320 --> 01:21:48,880
Speaker 2: game was over. It was a game of musical chairs, right,

1561
01:21:48,920 --> 01:21:51,160
Speaker 2: and the music had stopped playing, And I was like,

1562
01:21:51,160 --> 01:21:52,760
Speaker 2: I'm just going to get out of the room, right,

1563
01:21:53,000 --> 01:21:56,200
Speaker 2: because you know you can overtrade these things, no, to

1564
01:21:56,240 --> 01:21:58,080
Speaker 2: say the very least. And also it's not my job.

1565
01:21:58,160 --> 01:21:59,559
Speaker 2: I actually do have a day job.

1566
01:21:59,640 --> 01:22:04,800
Speaker 1: Right, So that was kind of interesting. You're also located

1567
01:22:05,120 --> 01:22:10,479
Speaker 1: in Florida, in South Florida. What's it been like being

1568
01:22:10,680 --> 01:22:14,719
Speaker 1: a new dad in the midst of the west coast

1569
01:22:14,720 --> 01:22:20,120
Speaker 1: of Florida that really got shellacked by three consecutive everybody's

1570
01:22:20,160 --> 01:22:23,439
Speaker 1: talking about Helene, but what was a debbie over the

1571
01:22:23,479 --> 01:22:27,200
Speaker 1: summer really did some big damage and then the middle one,

1572
01:22:27,280 --> 01:22:30,120
Speaker 1: so it was like a triple hit. Yeah.

1573
01:22:30,160 --> 01:22:31,960
Speaker 2: I mean, I live in the Tampa area and I

1574
01:22:32,040 --> 01:22:34,479
Speaker 2: moved there two years ago, and I should have known

1575
01:22:34,560 --> 01:22:37,240
Speaker 2: something was wrong when I originally from Boston and was

1576
01:22:37,280 --> 01:22:42,320
Speaker 2: moving from Boston driving down and it was a hurricane

1577
01:22:42,360 --> 01:22:43,840
Speaker 2: showed up out of nowhere, and I actually had to

1578
01:22:43,840 --> 01:22:45,920
Speaker 2: stop my drive halfway down and just hang out in

1579
01:22:45,960 --> 01:22:48,320
Speaker 2: North Carolina. R just heh, well, well it's one of

1580
01:22:48,320 --> 01:22:50,880
Speaker 2: those they show up four or five days and you go, Okay,

1581
01:22:50,880 --> 01:22:53,840
Speaker 2: I'm watching the path and it became clear, you know,

1582
01:22:54,040 --> 01:22:57,320
Speaker 2: all my furniture is getting delivered the day before the

1583
01:22:57,400 --> 01:22:59,840
Speaker 2: hurricane's supposed to hit. I've got a pregnant wife who

1584
01:22:59,880 --> 01:23:02,439
Speaker 2: is accepting the delivery as I'm driving, you know, the

1585
01:23:02,520 --> 01:23:05,280
Speaker 2: car down and and it just I was like I

1586
01:23:05,280 --> 01:23:09,000
Speaker 2: should have left at that point. But most importantly, my

1587
01:23:09,080 --> 01:23:12,200
Speaker 2: family is safe. Our first floor of our house got

1588
01:23:12,200 --> 01:23:16,120
Speaker 2: completely destroyed, my car got totaled. It's all overshadowed by

1589
01:23:16,240 --> 01:23:18,920
Speaker 2: how amazing being a father is. It's just it's hard

1590
01:23:18,960 --> 01:23:22,320
Speaker 2: to complain about any of that in the grand scheme

1591
01:23:22,360 --> 01:23:25,160
Speaker 2: of life of just you know, I got a new kid,

1592
01:23:25,160 --> 01:23:26,480
Speaker 2: and it's amazing.

1593
01:23:26,280 --> 01:23:28,160
Speaker 1: What what's the rest of the neighborhood look like.

1594
01:23:30,280 --> 01:23:35,000
Speaker 2: It honestly is pretty devastating. So down near the water,

1595
01:23:35,479 --> 01:23:37,920
Speaker 2: every single restaurant is just gone.

1596
01:23:37,920 --> 01:23:40,280
Speaker 1: Just gone, just gone, like wiped off.

1597
01:23:40,160 --> 01:23:43,720
Speaker 2: Wiped off. We had we had an eight or nine

1598
01:23:43,760 --> 01:23:44,639
Speaker 2: foot storm surge.

1599
01:23:45,080 --> 01:23:47,880
Speaker 1: Yeah, so not quite sandy, but pretty close.

1600
01:23:47,720 --> 01:23:50,040
Speaker 2: Pretty close. So you can imagine all these beach front

1601
01:23:50,040 --> 01:23:53,320
Speaker 2: tiki bars, you know, under nine feet of water, and

1602
01:23:53,320 --> 01:23:54,200
Speaker 2: then the tide goes out.

1603
01:23:54,200 --> 01:23:55,280
Speaker 1: It's just nothing left.

1604
01:23:55,320 --> 01:23:59,160
Speaker 2: It's gone. You know, if you had a two story

1605
01:23:59,160 --> 01:24:01,680
Speaker 2: house in our neighborhood, your first floor was gone and

1606
01:24:01,720 --> 01:24:04,479
Speaker 2: the second floor is what remains. For those who had

1607
01:24:04,720 --> 01:24:08,560
Speaker 2: single story houses, which is the majority, you know, everything

1608
01:24:08,680 --> 01:24:12,439
Speaker 2: ends up on the curb. And so driving down our

1609
01:24:12,720 --> 01:24:16,080
Speaker 2: neighborhood for the last I guess two months now, it's

1610
01:24:16,200 --> 01:24:20,200
Speaker 2: just people's lives are on the curb. And what people

1611
01:24:20,280 --> 01:24:23,679
Speaker 2: don't tell you until you live this is that sea

1612
01:24:23,760 --> 01:24:27,479
Speaker 2: water is also mixed with sewage water, and so the

1613
01:24:27,520 --> 01:24:31,840
Speaker 2: whole place reeks, and all the plants die because they

1614
01:24:31,840 --> 01:24:35,559
Speaker 2: become so everyone's garden. So you're just driving around this

1615
01:24:35,640 --> 01:24:38,599
Speaker 2: place that looks like a trash hump dump as all

1616
01:24:38,600 --> 01:24:42,360
Speaker 2: the plants are dying and it smells awful. I mean,

1617
01:24:42,400 --> 01:24:45,719
Speaker 2: but aside from that wonderful place. Alert, are you gonna

1618
01:24:45,960 --> 01:24:47,400
Speaker 2: so you were you were renting?

1619
01:24:47,560 --> 01:24:47,760
Speaker 1: Right?

1620
01:24:47,920 --> 01:24:48,240
Speaker 2: Yes?

1621
01:24:48,320 --> 01:24:50,639
Speaker 1: So are you gonna stay there? You can relocate? What's

1622
01:24:50,640 --> 01:24:51,080
Speaker 1: the thinking?

1623
01:24:51,280 --> 01:24:54,040
Speaker 2: Well, you're asking the wrong person. You should ask my wife.

1624
01:24:54,160 --> 01:24:57,479
Speaker 2: I don't. I don't have executive power here. I think

1625
01:24:57,520 --> 01:25:01,120
Speaker 2: we will stay in the area. We really love where

1626
01:25:01,160 --> 01:25:04,840
Speaker 2: we live. Saint Pete is a wonderful area for us.

1627
01:25:04,840 --> 01:25:08,000
Speaker 2: We love raising our sun there for the moment. We'll

1628
01:25:08,000 --> 01:25:09,040
Speaker 2: see how it plays out.

1629
01:25:09,200 --> 01:25:11,360
Speaker 1: All right, that's really interesting. All right, my last two

1630
01:25:11,439 --> 01:25:15,559
Speaker 1: curve ball questions for you. At Cornell, you played rugby.

1631
01:25:15,680 --> 01:25:16,519
Speaker 1: Tell us about that.

1632
01:25:17,200 --> 01:25:21,720
Speaker 2: Yeah, so I grew up as a lacrosse player, got

1633
01:25:21,760 --> 01:25:24,719
Speaker 2: to Cornell, and I mean the lacrosse program there is phenomenal.

1634
01:25:24,800 --> 01:25:25,920
Speaker 2: I was never going to make the team.

1635
01:25:26,200 --> 01:25:29,040
Speaker 1: I was, I mean a serious, serious program.

1636
01:25:29,160 --> 01:25:31,519
Speaker 2: Yeah, and I've always enjoyed being athletics. So I was

1637
01:25:31,560 --> 01:25:33,880
Speaker 2: looking around what to do and.

1638
01:25:33,920 --> 01:25:35,679
Speaker 1: Where else can I break bones? Besides?

1639
01:25:36,160 --> 01:25:38,840
Speaker 2: Yeah, well this is particularly dumb because in high school

1640
01:25:38,880 --> 01:25:42,240
Speaker 2: I actually played lacrosse and got a skull fracture. Nice,

1641
01:25:42,280 --> 01:25:45,240
Speaker 2: So all the doctor said stopped playing sports. They wouldn't

1642
01:25:45,320 --> 01:25:47,519
Speaker 2: let me play soccer anymore because I couldn't head the ball.

1643
01:25:47,479 --> 01:25:50,559
Speaker 1: Really yeah, oh so that's the serious skull frack. Oh yeah,

1644
01:25:50,720 --> 01:25:54,439
Speaker 1: I broke my nose playing soccer, Yeah, in a collision

1645
01:25:54,600 --> 01:25:57,680
Speaker 1: and just remember waking up flat on my back. But

1646
01:25:57,760 --> 01:25:59,639
Speaker 1: nobody ever said you should stop.

1647
01:25:59,840 --> 01:26:01,400
Speaker 2: Yeah, I know. I had to get a spinal tap.

1648
01:26:01,479 --> 01:26:05,519
Speaker 2: I had had brain fluid leaking out my year. This

1649
01:26:05,920 --> 01:26:08,439
Speaker 2: was a serious one. So anyway, so I wasn't really

1650
01:26:08,479 --> 01:26:11,840
Speaker 2: supposed to play sports, and as I got to college,

1651
01:26:11,960 --> 01:26:13,960
Speaker 2: I thought about not playing anything, and there was a

1652
01:26:14,280 --> 01:26:17,560
Speaker 2: club rugby team, and I just said, you know, this

1653
01:26:17,600 --> 01:26:19,400
Speaker 2: sounds bad, but you're like, you're at an ivy league school.

1654
01:26:19,400 --> 01:26:20,920
Speaker 2: It's kind of like an it feels like an ivy

1655
01:26:21,000 --> 01:26:22,640
Speaker 2: leaguage sport. Was like, that would just be fun to

1656
01:26:22,720 --> 01:26:26,439
Speaker 2: go play rugby, right, And it was a ton of fun.

1657
01:26:26,520 --> 01:26:28,280
Speaker 2: And it was incredibly stupid of.

1658
01:26:28,240 --> 01:26:31,519
Speaker 1: Me, right, broken fingers and no.

1659
01:26:31,560 --> 01:26:34,479
Speaker 2: I survived pretty well. So I was, what's what's you've

1660
01:26:34,479 --> 01:26:36,960
Speaker 2: only known me as I've been older. I used to

1661
01:26:37,000 --> 01:26:38,479
Speaker 2: probably weigh forty pounds less.

1662
01:26:38,840 --> 01:26:39,800
Speaker 1: Oh really, I was.

1663
01:26:39,880 --> 01:26:43,439
Speaker 2: Yeah, in college, I was a very thin guy, and

1664
01:26:43,479 --> 01:26:45,879
Speaker 2: so they put me way out in the winger position

1665
01:26:45,920 --> 01:26:48,960
Speaker 2: where I just ran ropping down the field and so

1666
01:26:49,000 --> 01:26:51,800
Speaker 2: I wasn't really massively in the scrums in the ring.

1667
01:26:51,840 --> 01:26:55,960
Speaker 1: I gotcha. That's interesting. And and our final curve ball

1668
01:26:56,080 --> 01:27:01,960
Speaker 1: question favorite Dungeons and Dragons mind and why? And you

1669
01:27:02,000 --> 01:27:03,400
Speaker 1: could guess where that question is?

1670
01:27:03,479 --> 01:27:04,960
Speaker 2: Yeah, I can guess for that one.

1671
01:27:05,120 --> 01:27:06,960
Speaker 1: This is actually wait, let me give a little color.

1672
01:27:07,439 --> 01:27:10,680
Speaker 1: You're in a financial D and D game that's been

1673
01:27:10,680 --> 01:27:11,240
Speaker 1: going on.

1674
01:27:11,160 --> 01:27:13,720
Speaker 2: For years, so this is funny. Actually, if you'll allow me,

1675
01:27:14,360 --> 01:27:16,880
Speaker 2: can I can I bring this into the first your

1676
01:27:16,960 --> 01:27:19,960
Speaker 2: last five question? Sure? Because I believe the first of

1677
01:27:20,000 --> 01:27:22,160
Speaker 2: your last five questions you ask every guest is what

1678
01:27:22,280 --> 01:27:23,519
Speaker 2: content are you consuming?

1679
01:27:23,760 --> 01:27:25,719
Speaker 1: Right? What are you watching? Listening?

1680
01:27:25,880 --> 01:27:28,880
Speaker 2: And the problem is with a rapidly expanding business and

1681
01:27:28,920 --> 01:27:30,800
Speaker 2: a young kid at home, I don't have time to

1682
01:27:30,800 --> 01:27:34,120
Speaker 2: watch anything. But what I have carved time out in

1683
01:27:34,200 --> 01:27:38,559
Speaker 2: my life for has been this Dungeons Dragons game. It's

1684
01:27:38,600 --> 01:27:40,519
Speaker 2: hard to say with the serious face, right, but there

1685
01:27:40,560 --> 01:27:42,960
Speaker 2: are seven of us in the industry who started five

1686
01:27:43,040 --> 01:27:46,160
Speaker 2: years ago and we play weekly and it's three hours

1687
01:27:46,240 --> 01:27:49,120
Speaker 2: and that sounds incredibly nerdy. But for those who have

1688
01:27:49,160 --> 01:27:53,760
Speaker 2: never played Dungeons and Dragons is really a collaborative storytelling.

1689
01:27:54,000 --> 01:27:58,840
Speaker 2: Right game. We have an unbelievable guy who runs the game,

1690
01:27:58,840 --> 01:28:03,360
Speaker 2: who is just this imaginative world builder. So imagine, you know,

1691
01:28:03,360 --> 01:28:05,240
Speaker 2: if you like fantasy or sci fi, you can run

1692
01:28:05,280 --> 01:28:09,400
Speaker 2: it however you want. He builds these unbelievably complex worlds

1693
01:28:09,520 --> 01:28:12,439
Speaker 2: that we get to explore as characters, and he has

1694
01:28:12,479 --> 01:28:15,680
Speaker 2: a big narrative arc, but he's constantly adapting to how

1695
01:28:15,720 --> 01:28:18,720
Speaker 2: we interact with the world. And then there's the randomness,

1696
01:28:18,720 --> 01:28:20,439
Speaker 2: which is when you try to do something, you're rolling

1697
01:28:20,520 --> 01:28:22,720
Speaker 2: dice and your success or failures based on the dice.

1698
01:28:22,720 --> 01:28:25,280
Speaker 2: So the dice play a role in the story. And

1699
01:28:25,360 --> 01:28:27,559
Speaker 2: so for me, that's been a really big outlet of

1700
01:28:27,600 --> 01:28:30,519
Speaker 2: not only fun with the guys, but that's a lot

1701
01:28:30,520 --> 01:28:33,400
Speaker 2: of content consumption in the sense of the story's playing

1702
01:28:33,400 --> 01:28:35,880
Speaker 2: out in front of me, but also I get to

1703
01:28:36,040 --> 01:28:38,519
Speaker 2: collaborate and be a creative part of the story creation.

1704
01:28:38,600 --> 01:28:41,080
Speaker 2: So that's been a really special part of my life

1705
01:28:41,120 --> 01:28:42,040
Speaker 2: for the last five years.

1706
01:28:42,080 --> 01:28:45,439
Speaker 1: So that'll be our first question. Because you're not really

1707
01:28:45,520 --> 01:28:49,800
Speaker 1: watching or streaming much, let's talk about mentors who helped

1708
01:28:49,960 --> 01:28:51,000
Speaker 1: shape your career.

1709
01:28:51,439 --> 01:28:55,000
Speaker 2: So there, I will say this ties to some of

1710
01:28:55,040 --> 01:28:56,640
Speaker 2: the latter questions. I think one of the mistakes I

1711
01:28:56,640 --> 01:28:58,400
Speaker 2: made early in my career is not appreciating how much

1712
01:28:58,439 --> 01:29:01,639
Speaker 2: of an apprenticeship industry. This is, especially the more niche

1713
01:29:01,680 --> 01:29:06,600
Speaker 2: you go into markets. There's just wisdom and experience that

1714
01:29:06,880 --> 01:29:09,799
Speaker 2: it's hard to learn for yourself, and it's very easy

1715
01:29:10,120 --> 01:29:12,400
Speaker 2: if you don't have that wisdom to knock yourself out

1716
01:29:12,439 --> 01:29:16,400
Speaker 2: of the business from a performance perspective. And so I didn't.

1717
01:29:16,439 --> 01:29:19,280
Speaker 2: I didn't understand that. I wish I had had more mentors.

1718
01:29:19,320 --> 01:29:21,320
Speaker 2: What I will say is on the business side, my

1719
01:29:21,400 --> 01:29:24,640
Speaker 2: father and my business partner are both phenomenal entrepreneurs, and

1720
01:29:24,680 --> 01:29:26,240
Speaker 2: I learned a ton on the business side from them.

1721
01:29:26,640 --> 01:29:31,400
Speaker 2: I will say I've been very fortunate reading and interacting

1722
01:29:31,439 --> 01:29:34,599
Speaker 2: with folks like Cliff Astness and Auntie ielman In who

1723
01:29:34,600 --> 01:29:37,720
Speaker 2: have been, you know, huge idols of mine and what

1724
01:29:37,760 --> 01:29:40,759
Speaker 2: they've contributed to the industry and just been very open

1725
01:29:40,840 --> 01:29:44,360
Speaker 2: to communicating with me. I would say, from an actual

1726
01:29:44,520 --> 01:29:47,800
Speaker 2: practitioner perspective, have been big mentors.

1727
01:29:47,840 --> 01:29:52,280
Speaker 1: Really really interesting both of them. At AQR. Yes, what

1728
01:29:52,400 --> 01:29:54,160
Speaker 1: about books? What are some of your favorites? What are

1729
01:29:54,160 --> 01:29:55,000
Speaker 1: you reading right now?

1730
01:29:55,479 --> 01:29:58,160
Speaker 2: So again, not a lot of time to read. I

1731
01:29:58,360 --> 01:30:00,920
Speaker 2: just got done listening to all Lord of the Rings

1732
01:30:00,960 --> 01:30:04,480
Speaker 2: on audio. I do it to a lot of audio books.

1733
01:30:04,160 --> 01:30:07,280
Speaker 1: And how was that on audio? As a post?

1734
01:30:07,320 --> 01:30:12,400
Speaker 2: So Andy Serkis, who played Gollam, who's a phenomenal voice actor,

1735
01:30:12,400 --> 01:30:14,680
Speaker 2: read all the books and he is so good at

1736
01:30:15,000 --> 01:30:18,959
Speaker 2: like when he did Gandolf it sounded like Ian McKellen.

1737
01:30:19,240 --> 01:30:21,080
Speaker 1: Really, he's doing voices.

1738
01:30:21,120 --> 01:30:25,479
Speaker 2: He's doing voices, and it's just you know, again, if

1739
01:30:25,479 --> 01:30:26,840
Speaker 2: you're not into that type of book, you're not going

1740
01:30:26,920 --> 01:30:29,280
Speaker 2: to enjoy it. But he brings it to life with

1741
01:30:29,360 --> 01:30:32,400
Speaker 2: such vibrancy that it's not someone just reading the book.

1742
01:30:32,400 --> 01:30:35,519
Speaker 2: It's like he is. He's singing the songs, he's playing

1743
01:30:35,560 --> 01:30:38,200
Speaker 2: the characters, he's giving it to you like a play.

1744
01:30:38,800 --> 01:30:40,680
Speaker 2: It was just really, I mean, I got through all

1745
01:30:40,720 --> 01:30:43,439
Speaker 2: three books very quickly, and I wish I had I

1746
01:30:43,479 --> 01:30:46,040
Speaker 2: had more. So that's one I did just recently. And

1747
01:30:46,040 --> 01:30:48,680
Speaker 2: I tend to do audio books because it's easier for

1748
01:30:48,720 --> 01:30:50,040
Speaker 2: me when I go out for a walk or a

1749
01:30:50,120 --> 01:30:52,800
Speaker 2: run to listen to that than it is for me

1750
01:30:52,840 --> 01:30:54,120
Speaker 2: at the end of a day to say I'm gonna

1751
01:30:54,120 --> 01:30:55,680
Speaker 2: get through ten pages of a book and then fall

1752
01:30:55,720 --> 01:30:56,720
Speaker 2: asleep drooling on it.

1753
01:30:58,000 --> 01:31:02,240
Speaker 1: I know what that is like our final two questions

1754
01:31:02,479 --> 01:31:05,519
Speaker 1: what sort of advice would you give to a recent

1755
01:31:05,560 --> 01:31:10,040
Speaker 1: college grad interested in a career in quantitative investment.

1756
01:31:10,800 --> 01:31:13,759
Speaker 2: So I'll go back to what I just said, which

1757
01:31:13,840 --> 01:31:16,840
Speaker 2: was and I was interesting. I was just at a

1758
01:31:16,880 --> 01:31:19,439
Speaker 2: symposium at the College of Charleston, which is put on

1759
01:31:19,640 --> 01:31:21,519
Speaker 2: for their students, and I said the same thing to

1760
01:31:21,560 --> 01:31:24,519
Speaker 2: their students, which is, I'm loath to give advice. But

1761
01:31:24,800 --> 01:31:27,160
Speaker 2: my experience was I wish I had a mentor. I

1762
01:31:27,200 --> 01:31:30,200
Speaker 2: wish I had understood that for where I was trying

1763
01:31:30,240 --> 01:31:32,559
Speaker 2: to go, I would have gotten there a lot faster

1764
01:31:33,120 --> 01:31:36,720
Speaker 2: if I had found a hands on mentor and understood

1765
01:31:36,720 --> 01:31:40,000
Speaker 2: that this is an apprenticeship industry. Whether you are looking

1766
01:31:40,040 --> 01:31:43,639
Speaker 2: to do deep quant research or looking to build product

1767
01:31:43,880 --> 01:31:47,400
Speaker 2: or run an ria, every side of it has so

1768
01:31:47,400 --> 01:31:51,080
Speaker 2: many complicated facets that you have to navigate, from the

1769
01:31:51,200 --> 01:31:55,560
Speaker 2: regulatory side to understanding the behavior of your clients, understanding

1770
01:31:55,600 --> 01:31:59,000
Speaker 2: the markets and the microstructure and who's operating in them.

1771
01:31:59,320 --> 01:32:02,080
Speaker 2: That trying to cover that all on your own, there's

1772
01:32:02,120 --> 01:32:04,640
Speaker 2: a great chance you don't survive it. And so to me,

1773
01:32:04,840 --> 01:32:08,120
Speaker 2: I wish I take that back. I've had a phenomenal career.

1774
01:32:08,160 --> 01:32:11,879
Speaker 2: I'm very lucky. I wouldn't change a thing, but I

1775
01:32:11,880 --> 01:32:15,080
Speaker 2: if I was doing it another path, I would have said, Man,

1776
01:32:15,120 --> 01:32:16,839
Speaker 2: maybe I should have just gone to work at AQR

1777
01:32:16,960 --> 01:32:20,439
Speaker 2: for a while. That might have jumped me forward, you know,

1778
01:32:20,479 --> 01:32:22,240
Speaker 2: instead of stumbling in the dark for so long.

1779
01:32:22,720 --> 01:32:25,000
Speaker 1: Except you would still be at AQR. If you worked

1780
01:32:25,000 --> 01:32:26,760
Speaker 1: at AQR, the you.

1781
01:32:26,720 --> 01:32:28,920
Speaker 2: Know what, I'm firsall, they wouldn't have hired me. Well,

1782
01:32:29,360 --> 01:32:30,960
Speaker 2: they have a lot smarter people than me.

1783
01:32:31,400 --> 01:32:35,759
Speaker 1: I'm kind of sad about the demise of Twitter because

1784
01:32:36,880 --> 01:32:41,080
Speaker 1: it was this, at least in finance and finn twit

1785
01:32:42,360 --> 01:32:46,840
Speaker 1: there was this ability to have conversations with people, whether

1786
01:32:46,920 --> 01:32:49,759
Speaker 1: it was in public or just slipping into someone's DM

1787
01:32:49,840 --> 01:32:55,759
Speaker 1: and chatting. That seems to have kind of faded away.

1788
01:32:55,960 --> 01:32:59,840
Speaker 1: But like the twenty tens was a golden era of

1789
01:33:01,600 --> 01:33:05,600
Speaker 1: I don't even know what else to call it, networking, mentorship, connections.

1790
01:33:06,439 --> 01:33:09,000
Speaker 1: Just hey, you're right working on this, I did some

1791
01:33:09,040 --> 01:33:10,639
Speaker 1: research on this. You might want to take a look

1792
01:33:10,680 --> 01:33:14,080
Speaker 1: at it. Oh thanks, that's really like there was a

1793
01:33:14,840 --> 01:33:22,720
Speaker 1: very level playing field of not even mentorship, just encouragement

1794
01:33:23,000 --> 01:33:25,519
Speaker 1: from people. I kind of feel a little bit of

1795
01:33:25,520 --> 01:33:27,559
Speaker 1: a loss that that's gone away. I don't know how

1796
01:33:27,600 --> 01:33:29,639
Speaker 1: you like you were right in the thick of this,

1797
01:33:29,960 --> 01:33:32,759
Speaker 1: as well as so many other people we know in common.

1798
01:33:33,280 --> 01:33:36,200
Speaker 2: I'm still very active on Twitter, but it's a very

1799
01:33:36,760 --> 01:33:40,920
Speaker 2: curated thing for me. What I find is, I like

1800
01:33:41,000 --> 01:33:45,200
Speaker 2: I'm I'm in groups, for example, of forty to fifty

1801
01:33:46,360 --> 01:33:49,360
Speaker 2: quants who can't disclose who they are and they don't

1802
01:33:49,400 --> 01:33:51,840
Speaker 2: want to share a lot publicly, but you've built up

1803
01:33:51,880 --> 01:33:54,719
Speaker 2: this trust with them that you can ask these questions

1804
01:33:54,720 --> 01:33:56,960
Speaker 2: of things you're working on and get feedback from people

1805
01:33:57,000 --> 01:33:59,240
Speaker 2: all across the industry in a way that I'm still

1806
01:33:59,240 --> 01:34:01,920
Speaker 2: not sure I could find anywhere else. One of the

1807
01:34:01,960 --> 01:34:05,200
Speaker 2: things I've noticed is back in the mid twenty tens

1808
01:34:05,240 --> 01:34:07,920
Speaker 2: early twenty tens, the community was just smaller, and so

1809
01:34:07,960 --> 01:34:10,759
Speaker 2: you could have a lot of conversations in public. As

1810
01:34:10,840 --> 01:34:14,479
Speaker 2: Twitter grew and grew and grew, just the request for

1811
01:34:14,560 --> 01:34:17,080
Speaker 2: your time became more and more. It used to be

1812
01:34:17,120 --> 01:34:21,000
Speaker 2: I might have one some young person reaching out to

1813
01:34:21,000 --> 01:34:23,800
Speaker 2: ask me a question. Now it might be twenty times

1814
01:34:23,800 --> 01:34:26,320
Speaker 2: the volume, and it's just it's hard to be as

1815
01:34:26,400 --> 01:34:29,160
Speaker 2: responsive and have the intimate connections I think you had

1816
01:34:29,160 --> 01:34:30,560
Speaker 2: when it was a smaller community. So I know a

1817
01:34:30,600 --> 01:34:33,200
Speaker 2: lot of people who there are Twitter has its problems,

1818
01:34:33,200 --> 01:34:35,080
Speaker 2: but a lot of people who bemoan the loss of

1819
01:34:35,080 --> 01:34:37,720
Speaker 2: that prior experience. I think it was a small community

1820
01:34:37,800 --> 01:34:40,880
Speaker 2: aspect that has disappeared, and it's hard to rebuild that

1821
01:34:40,960 --> 01:34:42,320
Speaker 2: unless you build your own WALLT.

1822
01:34:42,120 --> 01:34:45,439
Speaker 1: Guying, There's no doubt that that's part of it. I've

1823
01:34:45,479 --> 01:34:49,400
Speaker 1: also found that I spend much less time in like

1824
01:34:49,520 --> 01:34:53,080
Speaker 1: the main open channel, and now everything is for me.

1825
01:34:53,240 --> 01:34:57,920
Speaker 1: He has been lists driven, whether it's economics or markets

1826
01:34:58,200 --> 01:35:01,000
Speaker 1: or I even create a create a separate list just

1827
01:35:01,040 --> 01:35:05,640
Speaker 1: for charts and put a bunch of guys who were

1828
01:35:05,680 --> 01:35:10,160
Speaker 1: technically oriented, and it like a lot of the worst

1829
01:35:10,200 --> 01:35:13,440
Speaker 1: aspects of Twitter go away when you're in a curated

1830
01:35:13,520 --> 01:35:16,040
Speaker 1: list of people who are like minded.

1831
01:35:15,760 --> 01:35:18,120
Speaker 2: But you lose a bit of the serendipity discovery. Yes,

1832
01:35:18,160 --> 01:35:21,080
Speaker 2: exactly right, and so then you're going, well, I hope

1833
01:35:21,120 --> 01:35:24,120
Speaker 2: someone retweets something interesting so I can discover a new person.

1834
01:35:24,400 --> 01:35:25,880
Speaker 2: And they're absolutely trade offs. Two.

1835
01:35:25,960 --> 01:35:28,720
Speaker 1: I mean, so it wasn't summer of twenty four, it

1836
01:35:28,720 --> 01:35:31,240
Speaker 1: was summer of twenty three. I went out to dinner,

1837
01:35:31,360 --> 01:35:37,440
Speaker 1: I come back home and there was a password requests

1838
01:35:37,920 --> 01:35:40,760
Speaker 1: made a change on Twitter that I hadn't make, and

1839
01:35:40,800 --> 01:35:42,799
Speaker 1: I go to say, this is a me, They've already

1840
01:35:43,000 --> 01:35:47,000
Speaker 1: given the account away to somebody else, like they're stupid.

1841
01:35:47,120 --> 01:35:52,200
Speaker 1: First of all, making two factor authentication an option just

1842
01:35:52,240 --> 01:35:55,760
Speaker 1: so idiotic. And it took three months to get the

1843
01:35:55,800 --> 01:36:00,280
Speaker 1: account back, and I finally got it back, and some

1844
01:36:00,360 --> 01:36:03,040
Speaker 1: of our mutual friends said, hey, you're not going to

1845
01:36:03,080 --> 01:36:06,559
Speaker 1: recognize the place you missed, Like it's like when at

1846
01:36:06,600 --> 01:36:10,120
Speaker 1: the last inning of a baseball game when everybody files

1847
01:36:10,160 --> 01:36:12,479
Speaker 1: out and you're in there, you're in the bathroom and

1848
01:36:12,520 --> 01:36:14,400
Speaker 1: you come back and where did everybody go?

1849
01:36:14,640 --> 01:36:16,920
Speaker 2: I'll tell you during that period I had some fantastic

1850
01:36:16,920 --> 01:36:19,400
Speaker 2: conversations with you over DM, so I you know, I

1851
01:36:19,439 --> 01:36:20,479
Speaker 2: miss whoever that was.

1852
01:36:22,120 --> 01:36:26,000
Speaker 1: It's really kind of you know, it's it's so weird

1853
01:36:26,040 --> 01:36:30,320
Speaker 1: to feel like I never felt a loss when Facebook

1854
01:36:30,960 --> 01:36:36,320
Speaker 1: changed the whole to use Corey Doctor's phrase incation of

1855
01:36:36,560 --> 01:36:41,800
Speaker 1: places like eBay and Amazon and Google like it's annoying.

1856
01:36:41,960 --> 01:36:46,000
Speaker 1: I don't love what's happened to Apple, although they're still

1857
01:36:46,200 --> 01:36:49,639
Speaker 1: functional useful for me. Twitter is the first one where

1858
01:36:49,680 --> 01:36:54,679
Speaker 1: it's like, man, this was really special in our space,

1859
01:36:55,439 --> 01:37:00,080
Speaker 1: and then it's just gone away, And you know, there

1860
01:37:00,120 --> 01:37:02,040
Speaker 1: are a lot of reasons to not be happy with

1861
01:37:02,200 --> 01:37:07,479
Speaker 1: Elon Musk, not the least of which are the never

1862
01:37:07,600 --> 01:37:11,160
Speaker 1: ending promises for products that don't seem to arrive with

1863
01:37:11,280 --> 01:37:15,599
Speaker 1: any sort of reasonable timeline. But man, firing eighty percent

1864
01:37:15,640 --> 01:37:19,679
Speaker 1: of the engineers and leaving a you know, a smoking

1865
01:37:19,760 --> 01:37:25,639
Speaker 1: hulk behind, it's really kind of disappointing. I understand why

1866
01:37:25,640 --> 01:37:30,880
Speaker 1: people don't love Twitter. I still have this like nostalgic

1867
01:37:30,960 --> 01:37:33,639
Speaker 1: feel for when it was good. It was so good.

1868
01:37:34,520 --> 01:37:37,120
Speaker 1: It's all right, all right? And our final question, what

1869
01:37:37,160 --> 01:37:39,120
Speaker 1: do you know about the world of investing that would

1870
01:37:39,120 --> 01:37:42,439
Speaker 1: have been useful to know when you were first launching

1871
01:37:42,479 --> 01:37:44,120
Speaker 1: in eighth nine.

1872
01:37:45,600 --> 01:37:48,559
Speaker 2: There's a phrase I have been repeating a lot in

1873
01:37:48,600 --> 01:37:51,520
Speaker 2: the last year and a half at my own business,

1874
01:37:52,080 --> 01:37:55,599
Speaker 2: which is, why are we playing the game on hard mode?

1875
01:37:56,120 --> 01:37:59,639
Speaker 2: Play the game on easy mode? I mean that both

1876
01:37:59,760 --> 01:38:06,000
Speaker 2: in the investment strategies we choose to pursue and the

1877
01:38:06,040 --> 01:38:09,160
Speaker 2: products we want to bring to market. I'm not going

1878
01:38:09,240 --> 01:38:10,880
Speaker 2: to talk so much to the products here, so I'm

1879
01:38:10,880 --> 01:38:12,880
Speaker 2: happy to go into that on the investment strategy side.

1880
01:38:13,080 --> 01:38:15,080
Speaker 2: I wish someone had just sat me down early in

1881
01:38:15,120 --> 01:38:20,040
Speaker 2: my career and said low breadth bets you don't get

1882
01:38:20,080 --> 01:38:23,599
Speaker 2: to repeat a lot. Don't do those type. Don't try

1883
01:38:23,640 --> 01:38:25,719
Speaker 2: to time the market. I mean, like every young person

1884
01:38:25,760 --> 01:38:27,479
Speaker 2: I spent a whole of course, I'm going to be

1885
01:38:27,479 --> 01:38:28,840
Speaker 2: the one to crack the market and figure out how

1886
01:38:28,840 --> 01:38:31,640
Speaker 2: to time it. It's a dumb low breadth bet. You

1887
01:38:31,640 --> 01:38:33,240
Speaker 2: don't get to repeat a lot. It's like trying to

1888
01:38:33,240 --> 01:38:35,559
Speaker 2: flip the coin three times in your life and guess

1889
01:38:35,600 --> 01:38:38,680
Speaker 2: heads all three times. It's just very unlikely and when

1890
01:38:38,680 --> 01:38:40,560
Speaker 2: you're wrong, there's a lot of damage. All right, So

1891
01:38:41,080 --> 01:38:43,519
Speaker 2: be smarter about the type of strategy you're going to pursue.

1892
01:38:44,280 --> 01:38:47,280
Speaker 2: By the way, the SMP five hundred is the hardest

1893
01:38:47,400 --> 01:38:50,720
Speaker 2: universe to try to actively pick stocks in. Maybe don't

1894
01:38:50,760 --> 01:38:53,280
Speaker 2: try to pick stocks there. Go play the game on

1895
01:38:53,439 --> 01:38:57,559
Speaker 2: easy mode where there's a proven opportunity, rather than saying

1896
01:38:58,120 --> 01:38:59,800
Speaker 2: having the ego to say no, I'm going to be

1897
01:38:59,840 --> 01:39:01,960
Speaker 2: the to figure it out. There are people who can

1898
01:39:02,000 --> 01:39:05,200
Speaker 2: beat the market. But even if I'm smart enough to

1899
01:39:05,240 --> 01:39:07,840
Speaker 2: figure it out or can find that edge, why not

1900
01:39:08,000 --> 01:39:10,479
Speaker 2: find it somewhere where it's easier. And so I think

1901
01:39:10,520 --> 01:39:13,680
Speaker 2: for me, I wish earlier in my career someone had

1902
01:39:13,680 --> 01:39:15,920
Speaker 2: really beaten into me. Are you just playing the game

1903
01:39:15,920 --> 01:39:19,840
Speaker 2: on hard mode just because you want to? Or is

1904
01:39:19,840 --> 01:39:22,000
Speaker 2: there an easier way to do this? At the end

1905
01:39:22,000 --> 01:39:24,840
Speaker 2: of the day, you're trying to meet this objective. What

1906
01:39:24,920 --> 01:39:26,080
Speaker 2: is the easiest way to meet it?

1907
01:39:26,640 --> 01:39:31,280
Speaker 1: Huh? Really interesting, Corey, thank you for being so generous

1908
01:39:31,400 --> 01:39:34,840
Speaker 1: with your time. We have been speaking with Corey Hofstein.

1909
01:39:35,280 --> 01:39:38,679
Speaker 1: He is not only the CEO and CIO of Newfound Research,

1910
01:39:39,040 --> 01:39:44,439
Speaker 1: but portfolio manager of Returned stack etf Suite. If you

1911
01:39:44,680 --> 01:39:48,439
Speaker 1: enjoy this conversation, well, check out any of the previous

1912
01:39:48,479 --> 01:39:52,200
Speaker 1: five hundred and forty we've had over the past ten years.

1913
01:39:52,560 --> 01:39:57,280
Speaker 1: You can find those at Bloomberg, iTunes, Spotify, YouTube, wherever

1914
01:39:57,360 --> 01:40:00,840
Speaker 1: you find your favorite podcast. And check out my new

1915
01:40:00,880 --> 01:40:06,000
Speaker 1: podcast At the Money, short single topic conversations with experts

1916
01:40:06,439 --> 01:40:09,600
Speaker 1: about subjects that affect your money, earning it, spending it,

1917
01:40:09,960 --> 01:40:13,120
Speaker 1: and investing it At the Money, in the Master's in

1918
01:40:13,160 --> 01:40:18,000
Speaker 1: Business podcast feed, or wherever you find your podcasts. I

1919
01:40:18,040 --> 01:40:20,000
Speaker 1: would be remiss if I did not thank the Crack

1920
01:40:20,280 --> 01:40:23,759
Speaker 1: staff who helps us put these conversations together each week.

1921
01:40:23,960 --> 01:40:27,600
Speaker 1: My audio engineer is Meredith Frank. Anna Luke is my producer.

1922
01:40:27,640 --> 01:40:30,880
Speaker 1: Sean Russo is my researcher. Sage Bauman is the head

1923
01:40:30,880 --> 01:40:34,439
Speaker 1: of podcasts here at Bloomberg. I'm Barry Retolts. You've been

1924
01:40:34,439 --> 01:40:40,920
Speaker 1: listening to Masters in Business on Bloomberg Radio.